Season of Change in this issue… - CMBA | California ... · CALIFORNIA MORTGAGE FINANCE NEWS 1...
Transcript of Season of Change in this issue… - CMBA | California ... · CALIFORNIA MORTGAGE FINANCE NEWS 1...
CALIFORNIA MORTGAGE FINANCE NEWS 1
CALIFORNIA MORTGAGE BANKERS ASSOCIATION
THE VOICE OF REAL ESTATE FINANCE
FA L L2 0 1 4
in this issue…CHAIRMAN’S CORNER page 1
EXECUTIVE DIRECTOR’S LETTER page 5
LEGISLATIVE REPORT page 7
RESIDENTIAL NEWS page 8
COMMERCIAL NEWS page 9
ROUNDTABLE ARTICLE page 10
LEGAL—RESIDENTIAL page 13
LEGAL—COMMERCIAL page 18
CALENDAR page 21
WELCOME NEW MEMBERS page 23
PHOTO GALLERIES page 43
ROAD TRIP page 50
Contact: California Mortgage
Bankers Association
(916) 446-7100 Phone
(916) 446-7105 Fax
[email protected] Email
555 Capitol Mall, Suite 440
Sacramento, CA 95814
California Mortgage Finance News is published four
times per year: Spring, Summer, Fall and Winter.
California Mortgage Finance News is published by
the California Mortgage Bankers Association.
editor: Dustin Hobbs
publisher/layout: Wolfe Design Marketing
Change! Again!
With the return
of Fall comes the
return of election
season, and this
year’s was quite
the game-changer.
Again. It seems a two-year cycle these
days that each party gets swept in a
‘wave’ only to get rejected two years
later. Unless you’ve been under a rock
for the past few weeks, you know that
the Republicans have captured control
of the U.S. Senate and several additional
state governorships. That’s certainly
the main headline, but there are several
other results that you may not be
as aware of, but could shake up our
industry even more than swapping out
Harry Reid for Mitch McConnell will.
In my backyard, in Richmond,
industry (including the CMBA) has
been diligently fighting a dangerous
eminent domain scheme designed to
help underwater borrowers by seizing
the mortgage notes from investors. If
you’ve heard this before, bear with
me! Just over a year ago, the city
seemed poised to put the plan into
action, giving mortgage investors a
hard deadline to either sell the targeted
loans to the city or face eminent
domain proceedings. That deadline
came and went with no action, in
large part due to the makeup of the
city council. Proponents of the plan
were just short (a single vote at times)
of having enough support to move
CHAIRMAN’S CORNER
Season of Change ReturnsBY CHRISTOPHER M. GEORGE, CMG FINANCIAL, CMBA CHAIRMAN
CONTINUED ON PAGE 4
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CHAIRMAN’S CORNER CONTINUED FROM PAGE 1
Feeling BuriedBy New
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forward with eminent domain. As a
result, the plan’s supporters have spent
the past year trying to find partners
in San Francisco and other locales
that would partner with the city and
share costs and (it was hoped) liability,
essentially doing an end-run around
the unfavorable politics on the council.
That may have all changed,
however, on election night. All seven
council members were on the ballot,
either running for a different seat or
up for reelection. Although the council
seats are technically non-partisan, the
race quickly turned into an ideological
contest between a progressive ‘slate’ of
candidates and three existing council
members (Corky Boozè, Nat Bates,
and Jim Rogers) who were viewed as
more business-friendly, and had been
seen as votes against the eminent
domain program. On election night,
all three lost, and the progressive
coalition was swept into power, and
now may hold up to 6 of the 7 seats on
the council. One of the newly-elected
members of the council specifically
mentioned the plan in his post-election
comments, saying “With the new
council, Richmond will continue to
be the trendsetter for local, state and
national policies. Eminent domain is
one of those, and I think it will become
a tool the cities across the country
will use.” After a year of simmering
beneath the radar, I expect the eminent
domain issue to be back on the front
burner in 2015. Stay tuned.
In Sacramento, we did see
some change, albeit less than at the
national level or in Richmond. Gov.
Jerry Brown was reelected by a wide
margin, and the Democrats continued
to dominate all the statewide
offices. However, the calculation
may have changed a bit in the
Legislature, as Democrats lost their
2/3 ‘supermajority’ advantage in both
the Senate and the Assembly. This
means that on certain bills that require
a 2/3 vote, Republicans will regain
some bargaining power they lost two
years ago. Make sure and read Pat
Zenzola’s column to keep up on what
is happening in Sacramento now and
during the legislative session that will
start up in January.
Change is coming to CMBA
as well, and I am excited to let you
know that in 2015, we will be rolling
out some exciting new programs and
features that will enhance the value of
your membership dollars, and improve
upon the three pillars that CMBA
stands on: advocacy, education, and
connection. I don’t want to give away
too much now, but early next year
I’ll give you all the details and I trust
you’ll be as excited as I am!
Change is by its nature disruptive,
but not necessarily destructive. It
sharpens our focus and refines our
abilities. That’s true of mortgage
companies facing regulatory onslaught,
and trade groups like the California
MBA, working to find new solutions
and new ways to serve our members.
•
CALIFORNIA MORTGAGE FINANCE NEWS 5
2015 will mark the
60th anniversary
of the California
MBA! Six decades
of gradual
development to
evolve into the
association that we are today. Our
organization has weathered wars,
dramatic interest rate fluctuations,
epic bounds forward in technology,
the financial crisis of the early 2000’s
and the onslaught on legislative and
regulatory burdens that have been
placed upon the industry. Over the
years, the term “mortgage banker”
has been viewed as the catalyst for
achieving the American dream, as well
as the cause for global financial crisis.
Through the best of times and the
biggest challenges the California MBA
has remained committed to providing
the strongest representation for the
mortgage industry and serves as the
organization that attracts industry
leaders from across the nation. As we
look back on our 60 years, let’s think
about how we got here.
In early 1955, with strong local
associations in both San Francisco
and Los Angeles, the leaders of the
future California MBA promoted
the idea of forming a statewide
association. The main thrust for
creating this organization came from
Urban K. Wilde, who served as the
California MBA’s first President, and
Willis Bryant, who was the first Vice
President. These individuals gathered
with other mortgage industry leaders
at the Del Monte Lodge (which is now
The Lodge at Pebble Beach) in April
1955 to form the association.
The original goals were simple:
further promote the industry (which
took many forms over the years),
establish an effective legislative
and regulatory advocacy program,
foster strong business relationships
and personal friendships among the
membership, and to attract money out
West! With so much of our legislative
and regulatory focus in recent years
on residential mortgage banking, it is
interesting to note that the founders,
in part, created the California
Mortgage Bankers Association in an
effort to attract East coast investors to
invest in commercial real estate in our
state! Granted they also saw value in
a statewide organization to represent
the real estate finance industry before
the State Legislature but strengthening
our state was a key factor.
Over the years, the California
MBA has been at the forefront of
every legislative and regulatory
proposal that’s come before our
policymakers. We’ve never strayed
from the over-arching message
of protecting access to affordable
credit for qualified borrowers. Our
organization has partnered with other
industry associations to shape the
direction of lending in California, and
we’re not done! Today our member
companies join the thousands of
people who’ve come before them
to work with our lobbying team to
formulate positions on key issues in
our state.
You cannot tell a story about
the California MBA without
mentioning the fact that it was THE
social connection for the industry
before social media! The photos of
conferences and events from the first
few decades show how close these
friendly competitors were and how
important developing and maintaining
those business relationships were
to the industry. We are still a source
of connections and pride ourselves
on offering a variety of methods to
connect with industry leaders and
fellow members.
Education has also been a focal
EXECUTIVE DIRECTOR’S LETTER
Networking. Education. Connection.From the Beginning
BY SUSAN MILAZZO, CMBA EXECUTIVE DIRECTOR
CONTINUED ON PAGE 20
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CALIFORNIA MORTGAGE FINANCE NEWS 7
The 2014
November general
election resulted
in a strong wave
of victories for
Republicans across
the nation, with a
gain of 7 Senate seats, 13 House seats
and 3 governorships as of this writing.
The Republican wave, however, hit a
wall at the Sierra Nevada. Governor
Jerry Brown won a historic 4th term,
beating the Republican challenger
with roughly 59% of the vote, and
Democrats were successful at sweeping
all of the other California statewide
offices—Lt. Governor, Attorney
General, Secretary of State, Controller,
Treasurer and Insurance Commissioner.
The Governor’s two priorities on the
state ballot also won by wide margins:
Proposition 1, a $7.5-billion water bond
measure, and Proposition 2, which
shores up the state’s rainy day fund.
California Republicans did make
some gains in the State Legislature,
achieving the goal of keeping the
Democrats from obtaining the two-
thirds majority in the Legislature
that they initially achieved in the
2012 elections. Political scandals,
low voter turnout and concern about
one political party having too much
power are likely contributing factors
in the failure of Democrats to regain a
supermajority in the general election.
California experienced a historic low
voter turnout of approximately 30%
on Election Day. It takes weeks after an
election to determine the final turnout
percentage but it is quite possible that
when the count is complete it will be
around 40 %. The lowest previous
turnout percentage of registered voters
in a non-presidential general election, in
2002, was 50.6%. The real importance
of Republicans denying Democrats
supermajorities in the Legislature is that
while the budget can be approved with
a simple majority, it still takes two-
thirds votes to raise taxes. That means
that any new state tax legislation, such
as split-roll changes to Proposition 13
that would raise commercial property
taxes, will most likely need to be put
on the ballot by voters’ signatures
instead of by the Legislature.
Switching gears to the legislative
session, the California Legislature
adjourned early Saturday morning of
the Labor Day weekend, concluding
its 2014 legislative session. September
30 was the last day for the Governor
to sign or veto bills passed by the
Legislature in the final days of session.
Several bills of interest to CMBA’s
members were still being considered
in the last weeks of the legislative
session, and summaries of those
measures are listed below.
AB 1393—Personal Income Taxes:
Mortgage Debt Forgiveness
Chaptered by Secretary of State—
Chapter 152, Statutes of 2014.
AB 1393 extends the exclusion
of the discharge of qualified principal
residence indebtedness for state
income tax purposes to debt that
is discharged on or after January 1,
2013, and before January 1, 2014. The
Personal Income Tax Law provides for
modified conformity to provisions of
federal income tax law relating to the
exclusion of the discharge of qualified
principal residence indebtedness
from an individual’s income if that
debt is discharged after January 1,
2007, and before January 1, 2013.
The federal American Taxpayer Relief
Act of 2012 extended the operation
of those provisions to qualified
principal residence indebtedness that
is discharged before January 1, 2014,
and AB 1393 conforms to the federal
extension. CMBA supported AB 1393,
and it has been signed into law with
an immediate effective date.
AB 1698—Voiding of False or
Forged Real Property Documents
Chaptered by Secretary of State—
Chapter 455, Statutes of 2014.
AB 1698 originally would
have required that after a person is
LEGISLATIVE REPORT
Election Results Boost Republicans in Nation, But State Bucks TrendBY PAT ZENZOLA, KP PUBLIC AFFAIRS, CMBA LEGISLATIVE COUNSEL
CONTINUED ON PAGE 21
FALL 20148
Millennials are an
important target
market in the
mortgage industry
because they
now represent
the largest pool
of potential homebuyers. Defined
between the ages of 14–34, millennials
make up a population of roughly 800
million—larger than that of the baby
boomer generation. Considered the
most educated generation to date, this
demographic requires more information,
research and brand engagement before
making a decision to purchase.
Marketing and communicating
to a younger generation commands
a very different approach to that of
other generations. Traditional forms
of marketing, such as direct mail, print
ads, or even email marketing are not as
effective with this group. Millennials
understand what spam email looks like;
they can vet it out and delete it quicker
than you could imagine. Direct mail is
also ineffective because this group goes
online to search for the information they
need. In turn, text messaging will only
be effective once a relationship has been
built. In order to earn a millennial as a
personal client, mortgage professionals
must understand and familiarize
themselves with the way this generation
engages through various media.
Millennials are really saying “don’t sell
me, engage with me.”
American Pacific Mortgage (APM)
positions itself in the front-line of social
media engagement, taking a millennial-
friendly approach with its interactions.
However, companies should refrain from
selling through social media outlets,
such as Pinterest, LinkedIn, Twitter and
Facebook, but rather use them as a way
to engage and educate this audience.
Because this generation relies heavily
on social endorsements when making
a buying decision, it is vital that your
brand is positively represented online,
both in consumer reviews and paid
media. They have grown up in an era
that has endless choices, creating a
critical need to tread lightly and patiently,
yet with clear intention. It’s very easy
to figure out if you are being sold, and
selling, as a stereotype, holds an array of
negative connotations of pushy behavior
and car salesman mentality.
So how do you communicate and
market to this core group? Positive
affirmations and social endorsements
heavily influence the buying decision of
this audience, so you need to educate
them and earn that trust to get the
commitment to purchase. Boil it down
and get simplistic: this demographic starts
its shopping process online. With the
amount of viable information accessible
to anyone, this generation capitalizes
on an unspoken expectation of limitless
search engines and readily available
information. Engaging at the pre-shopping
level will ensure the consumer receives
RESIDENTIAL NEWS
Marketing to Millennials“Don’t sell me, engage with me”
BY LEIF A. BOYD, EXECUTIVE VICE PRESIDENT OF NATIONAL PRODUCTION, AMERICAN PACIFIC MORTGAGE CORPORATION
positive brand exposure early in their
decision-making process. When engaging,
keep in mind that these individuals are
searching for who they know and who
they can trust, so be familiar and honest
100 percent of the time. They are saying
“engage with me as a consumer, show
me what I need to know, educate me and
help me understand.”
Some consumers may be
unaware of the many advantages of
homeownership; such as: property
selection, customization and investment
opportunities. Although the thrill of
owning a home can seem attractive
to a prospective client, they must
also be educated about the process
and requirements to purchasing their
first home. As a generation who may
have some of the highest debt levels
in history, including student loans
and credit card debt, these potential
homeowners will need guidance to
manage their debt-to-income ratio,
spending habits and ideal credit balances
to maintain. Loan officers experiencing
success with the millennial generation
are the ones providing the most
valuable education. Take a consultative
approach based on this generation’s
communication preferences and create
deep, long-lasting relationships by
developing a personal connection
with each of your customers. Invest in
building these relationships and they
will invest in what you have to offer.
•
CALIFORNIA MORTGAGE FINANCE NEWS 9
COMMERCIAL NEWS
Top Trends to Look for in Commercial Lending in 2015BY ALEXA MIZRAHI, SENIOR LOAN OFFICER, LONE OAK FUND
As 2014 comes
to a close, it’s
important for
mortgage brokers
to recognize and
understand how
the commercial
real estate industry is shifting in order
to best leverage the increasing lending
competition and produce strong
results for their clients.
Niche Lending is on the Rise
Many new hard money lenders
have entered the market in the last
year, giving investors and developers
plenty of alternative financing options.
This increase is forcing lenders to
become more aggressive and creative
in both pricing and leverage.
From the lender’s perspective, it’s no
longer enough to advertise competitive
prices and LTVs. Today’s investors need
to get deals done quickly with experts
who understand their investment needs.
Private lenders have found that defining
a niche is key to setting themselves
apart, which is creating increased
opportunity for mortgage brokers to
find the money their clients need fast.
Lone Oak Fund, for example,
specializes in quick closes, short-term
first trust deeds of commercial and non-
owner occupied residential product.
In addition, many of these niche
CONTINUED ON PAGE 24
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ROUNDTABLE ARTICLE
Social Media and the Mortgage IndustryEDITOR’S NOTE—This is the latest in a series dealing with the issues facing the real estate finance industry. Each issue we touch on
a different topic, asking CMBA’s experts for their thoughts on the issue at hand. In this issue of CMFN, we ask three experts about social
media and its role on the mortgage industry. The topic was addressed further in a recent webinar hosted by CMBA’s Mortgage Quality &
Compliance Committee (MQAC). Jonathan Cannon is an Associate with BuckleySandler, LLP and presented on the topic during the
aforementioned webinar. Lisa Klika is SVP, Compliance & Quality Assurance with Guild Mortgage Company, and Michael Pfeifer is
CMBA’s General Counsel, and Managing Partner at Pfeifer & De La Mora, LLP.
The views and opinions expressed are solely those of the authors.
Q: What are some common
mistakes lenders and their
employees make on social media
that can put the company at risk?
Cannon: One of the most
common mistakes is for companies
and individuals to treat materials
shared on social media differently
than other public-facing materials.
Advertising is advertising, whether
it takes the form of a print ad, an
online banner ad, or a posting to
social media. Because the barriers
to entry are so low for social media
postings, lenders and their employees
may sometimes fail to recognize the
compliance obligations that still apply
to social media materials. But all
advertising has to keep in mind, for
instance, the requirements under TILA
when rates or other trigger terms
are stated, the requirements under
the SAFE Act and state laws related
to licensing disclosures, and the
requirements under the Federal Trade
Commission Act related to topics
such as deceptive advertising and the
use of testimonials.
But specifically, it may be most
common for lenders to fail to put
adequate recourses into their social
media program. Just because it may
be difficult for a lender’s compliance
department to monitor what its
branch employees may be sharing
online does not mean that the lender is
not obligated to monitor this activity.
Having strong social media policies
and procedures, along with sufficient
training and monitoring, are necessary
if a lender and its employees will be
sharing material through social media.
Klika: Social media is one of
the most challenging areas for a
lender to manage from a compliance
perspective. It is a free, accessible,
and instantaneous way for an
individual to have access to a large
population of “friends” (and foes).
In the case of a loan officer, there
is also the frequent misconception
that their posts on social media are
not considered advertisements or
otherwise regulated under state and
federal law. But in fact there are a
whole host of state and federal laws
that can govern social media activity.
The Truth in Lending Act, Gramm
Leach Bliley, and UDAAP are just a
few. Even when this is understood,
attempting to apply complex, layered,
and archaic regulatory requirements
to a 140 character “tweet” will make
any millennial roll their eyes and any
compliance officer suffer a migraine.
Social media policy and oversight
also have personnel implications.
Compliance and Human Resources
must work together to evaluate how
consumer financial protection and
employment law intersect.
Pfeifer: I define “social media” as
including the following: microblogging
websites like Facebook, Twitter,
Google Plus and My Space; Customer
review websites and bulletin
boards like Yelp, Google Local, and
Citysearch; photo and video sites
like YouTube and Flickr; professional
networking sites like LinkedIn; and
even virtual “worlds” like “Second
Life” and social games like “Farmville.”
The most common mistake lenders
and employees make is thinking
CONTINUED ON PAGE 25
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CALIFORNIA MORTGAGE FINANCE NEWS 13
What Flagstar Bank Can Teach Mortgage Servicers and Others About the CFPBBY JOSHUA dEL CASTILLO, PARTNER, & KENYON D. HARBISON, ASSOCIATE, ALLEN MATKINS
Residential
On September 29, 2014, the Consumer
Financial Protection Bureau (CFPB)
entered into a highly significant Consent
Order with Michigan-based loan
servicer, Flagstar Bank, F.S.B. (Flagstar).
Flagstar originates residential loans,
but its primary business is servicing
residential loans owned by others.
The CFPB’s enforcement effort and the
recent Consent Order related to this
business. Specifically, the CFPB alleged
that Flagstar had failed to comply with
a number of regulations regarding the
processing of borrower requests for loan
modifications. A total of $37.5 million
was assessed as a result of Flagstar’s
alleged misconduct. The most interesting
aspect of this case was arguably not
the $37.5 million damages and penalty
(though that grabbed initial headlines),
but was instead the prohibition against
Flagstar buying the right to service more
defaulted loans until Flagstar could prove
future compliance. The case provides an
important, and harsh, lesson to mortgage
servicers, and to other businesses.
The CFPB applied a number of
different rules and regulations to
Flagstar’s actions. These included 12
U.S.C. Sections 5536(a)(1)(B) & 5531(c)
(1) of the Consumer Financial Protection
Act of 2010 (CFPA), which authorize the
CFPB to punish “unfair, deceptive, or
abusive” practices. The CFPB also relied
upon the loss mitigation provisions
of the 2013 Real Estate Settlement
Procedures Act Mortgage Servicing Final
Rule (MSFR).
Pursuant to the terms of the
Consent Order, Flagstar neither
admitted nor denied any fact alleged
by the CFPB. Nothing in this article
is intended to suggest Flagstar was
guilty of any violation of applicable
regulations, or contradict anything
stated in the Consent Order. Instead,
the article highlights the consequences
of what were—as found by the CFPB—
particularly egregious violations.
As claimed by the CFPB, during
the period from 2011–2014, Flagstar
serviced loans for over 40,000
delinquent borrowers, for whom it
was responsible for administering
loss mitigation (loan modification)
applications. After the financial crisis,
even after a dramatic increase in the
volume of such applications, Flagstar
allegedly had no written policies,
and no quality assurance function.
The CFPB found that, at one point
in 2011, Flagstar had 13,000 active
loss mitigation applications, but only
25 full-time employees in its loss
mitigation department, not including a
third-party vendor in India reviewing
some applications. The average call
wait time for calls to Flagstar was 25
minutes, and almost 50% of callers
abandoned their calls. The CFPB
found that the understaffing continued
even after a 2011 restructuring, and
Flagstar routinely took more than
90 days to reach a loan modification
decision, three times the 30-day period
identified in applicable guidelines. Of
15,000 borrowers who applied for loss
mitigation, Flagstar closed more than
8,000 applications because of missing,
incomplete or expired documents.
Flagstar sometimes closed applications
due to expired documents, even where
its own delay had caused the documents
to expire, though more typically it
would require borrowers to submit
updated documents.
For a nine-month period in 2012
and 2013, Flagstar allegedly withheld
information borrowers needed to
complete their applications at all:
because of a vendor-related glitch,
Flagstar failed to send or delayed
sending its “missing document” letters to
borrowers, which were the only way a
borrower would know that documents
were missing from an application. Some
CONTINUED ON PAGE 29
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Not intended for consumer distribution. Not subject to Reg Z 1026.24. PrimeLending, a PlainsCapital Company (NMLS: 13649). PrimeLending, a PlainsCapital Company, is an equal opportunity employer and ensures that all applicants will receive consideration for employment without regard to race, color, religion, gender, national origin, age, disability, genetic, pregnancy or any other status as protected by federal, state or local law. Equal Housing Lender. © 2013 PrimeLending.
4153421694 [email protected] www.primelending.com/ 4685 MacArthur Court #480 Newport Beach, CA 92660 NMLS: 365837
Daniel Rawitch Senior Vice President, Regional Manager
Legal
FALL 201414
Residential
First District Court of Appeal Resurrects
“Negligent Loan Servicing” TheoryBY LUKE SOSNICKI, SENIOR COUNSEL, & STEPHANIE T. YU, ASSOCIATE, DYKEMA GOSSETT, PLLC
On August 7, 2014, California’s First
District Court of Appeal opined in
Alvarez v. BAC Home Loans Servicing,
L.P that a residential mortgage servicer
may owe a borrower a duty of care
when reviewing the borrower’s
loan-modification application.1 While
the First District in Alvarez arguably
followed its own precedent, the
decision nonetheless represents a
departure from the general rule in
California that a lender owes no duty
of care to a borrower if the lender
does not exceed its “conventional role
as a lender of money.”2
Over the last few years, borrower
lawsuits relating to servicers’ reviews
of loan-modification applications
have become increasingly common.
“Negligent loan servicing” is a claim
that often appears in such suits.
One of the better defenses to these
common-law negligence claims has
been that servicers owe borrowers
no duty of care to support the claims.
The servicer would argue its actions
in reviewing a loan-modification
application were within a servicer’s
“conventional role,” the court would
conclude the servicer owed no duty
to the borrower, and the court would
thereafter likely dismiss the claim.
In February 2013, the First District
breathed some new life into the
“negligent loan servicing” theory in
Jolley v. Chase Home Finance, LLC.3
There, the Court held that a bank’s
efforts to work with the borrower
to modify a construction loan could
have created a duty of care that, if
breached, would support a negligence
claim. The Court noted both federal
and state statutes demonstrating “a
rising trend to require lenders to deal
reasonably with borrowers in default
to try to effectuate a workable loan
modification,” and, while not relying
on any of these statutes directly,
found they nonetheless “affect[ed]
the assessment” of whether the loan
servicer owed the borrower a duty.
Ultimately the Court found there was
a triable issue with respect to whether
the servicer owed a duty of care.
Jolley’s holding, however, was
then quickly reined by both federal
and other California appellate courts.
In Lueras v. BAC Home Loans Servicing,
LP,4 for example, which was decided
eight months after Jolley, the Fourth
District Court of Appeal declined
to impose a duty of care, finding
that “a loan modification is the
renegotiation of loan terms, which
falls squarely within the scope of a
lending institution’s conventional role
as a lender of money.” Lueras was
followed by numerous federal courts
in dismissing common-law negligence
claims against loan servicers.5
In Alvarez, the First District has
regained some of its lost ground.
The Court acknowledged Lueras,
but elected to follow a 2010 federal
decision instead6 that applied a six-
factor test to determine whether
a duty should be imposed for
“negligent” modification reviews. The
Court further cited to a 2009 article on
“Understanding the Financial Crisis” to
conclude that “servicers may actually
have positive incentives to misinform
and under-inform borrowers…to
save money on customer service”
and “increase the chances they will
be able to collect late fees and other
penalties.” Based in part on these
assumptions, the Court held that
borrowers’ “lack of bargaining power
coupled with conflicts of interest that
exist in the modern loan servicing
industry provide a moral imperative
that those with the controlling hand
be required to exercise reasonable
care in their dealings with borrowers
seeking a modification.”
The Alvarez decision, which is
fairly recent, has not yet been cited
in any published California appellate
decisions, and has only been cited
in a handful of federal opinions. Of
these federal opinions, some have
found ways to distinguish it,7 but the
CONTINUED ON PAGE 31
Legal
CALIFORNIA MORTGAGE FINANCE NEWS 15
Residential
Foreclosing a Junior Deed of TrustHow Will the Court Treat the Senior Deed of Trust When the Same Creditor Held Both the Senior and the Junior?
BY MATTHEW E. PODMENIK, MANAGING PARTNER, McCARTHY HOLTHUS, LLP
It is nearly
impossible to
assess the effect
that foreclosure of
a creditor’s junior
deed of trust will
have on the same
creditor’s senior deed of trust without
involving an analysis of some or all of
the following legal terms: merger of
title; merger of rights; the full credit
bid rule; anti-deficiency; the security
first rule; and maybe even dragnet
clauses. Until the Supreme Court hears
a case on this exact issue, we are left
to guess which doctrine will be used
by the lower courts.
Recently, the Second Appellate
District issued a ruling answering the
question posed in this article’s title by
applying the full credit bid rule and
prohibiting the creditor from collecting
on either the senior or junior deeds of
trust. See Najah v. Scottsdale Ins. Co.,
230 Cal.App.4th 125 (Cal. App. 2nd
Dist. 2014).
In Najah, property was owned
by Orange Crest Realty Corporation
subject to two deeds of trust; the
beneficiary of the senior was the
Lantzman Trust, and Najah was
the beneficiary of the junior deed
of trust in the original amount of
$2,550,000.00. When the Trust
instituted a non-judicial foreclosure on
the first deed of trust, Najah purchased
their note for $1,749,000 and received
an assignment of all interests in the
CONTINUED ON PAGE 32
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Legal
FALL 201416
Residential
Nevada HOA Decision Catches Eye of IndustryBY JONATHAN D. JAFFE, PARTNER, K&L GATES, LLP
A Nevada Supreme
Court opinion,
issued in September
2014, has brought
renewed focus on
the perils of making
loans on properties
subject to “super priority” homeowner
association (“HOA”) assessment liens.1
To give some perspective, this
case involved an HOA‘s foreclosure
of its $6,000 lien, which wiped out
an $880,000 first deed of trust held by
a bank (the “Bank”). While this case
involved Nevada law, it has potentially
much wider application, as there are
a number of states with HOA super
priority lien statutes.2
Background
SFR Investments Pool 1, LLC. v. U.S.
Bank, N.A. (“SFR v. U.S. Bank”) involved
a lien for unpaid HOA dues on an
individual homeowner’s property in
Nevada. The applicable Nevada statute3
provided that the lien was “prior to all
other liens and encumbrances” on the
homeowner’s property. The court was
asked to decide whether the HOA lien
was a true priority lien, such that a
foreclosure of the lien would extinguish
a first deed of trust on the property. The
court held that the HOA’s nonjudicial
foreclose extinguished the Bank’s first
deed of trust.
The dispute involved a residence
in a common-interest community.4 The
property was subject to Covenants,
Conditions, and Restrictions (“CC&Rs”)
that were recorded in 2000. In 2007, the
property was encumbered by a bank’s
(the “Bank”) first deed of trust. By 2010,
the former homeowners had defaulted
on both their HOA dues and their loan
obligations to the Bank. The HOA and the
Bank each initiated nonjudicial foreclosure
proceedings against the property.
The HOA’s trustee’s sale was held
on September 5, 2012 (before the Bank’s
sale, which was scheduled for December
19, 2012). SFR Investments Pool 1, LLC
(“SFR”) purchased the property at the
HOA’s trustee’s sale. Shortly before the
Bank’s scheduled foreclosure sale SFR
filed an action to quiet title and enjoin
that sale, alleging that the Bank had
nothing to foreclose on since the HOA
Trustee’s Deed extinguished the Bank’s
deed of trust.
Not only did the court side with the
HOA, but it held that the Nevada statute
did not permit a provision in the HOA’s
CCR’s that contractually subordinated
the HOA’s super priority lien to the
Bank’s first deed of trust.
How Did We Get Here?
Super priority lien laws have been
in place for decades. Most of these laws
are based on uniform laws, such as the
Uniform Condominium Act originally
published by the National Conference
of Commissioners on Uniform State
Laws in 1977 to bring uniformity to the
state condominium statutes. The UCA
was followed by the Uniform Planned
Community Act in 1980, and then the
Uniform Common Interest Ownership
Act promulgated in 1982 (and amended
in 1995). The scope of super priority
liens varies depending on which version
of these uniform laws a state adopted,
and whether the state adopted non-
uniform versions of the uniform law.5
So why is this only now becoming
a significant issue? The answer is tied, at
least in part, to the mortgage crisis. For
years HOAs could count on receiving
payment from the purchaser at a
lender’s foreclosure sale in a relatively
short time frame. So even though an
HOA could have taken advantage of
its super priority, it was willing to
wait. But when state legislators and
regulatory agencies started imposing
significant changes in the loss mitigation
and foreclosure processes, HOAs
found lenders sometimes taking 2,
3 or more years to foreclose. Rather
than waiting for lenders to foreclose,
HOAs initiated their own foreclosures.
Investors and speculators were able to
pick up properties at these sales for a
small fraction of their value, and quickly
recouped their investments by renting
the properties to tenants.6
What Can a Lender or Servicer Do to
Avoid This?
Can lenders and servicers take
CONTINUED ON PAGE 33
Legal
CALIFORNIA MORTGAGE FINANCE NEWS 17
New CA Statute Aims to ClarifyBorrower Intentions & Ensure Lien Releases in HELOC Payoffs
BY STUART B. WOLFE, PARTNER, WOLFE & WYMAN LLP
A new California
statue taking effect
in 2015 resolves a
practical deficiency
in California’s
current statutory
mortgage loan
payoff protocol as it applies to home
equity lines of credit (HELOCs)
and other consumer lines of credit
secured by a borrower’s residence—
namely, discerning intended
paydowns from payoffs.
California’s Existing Statutory
Payoff Scheme
Presently, California has a straight-
forward and sensible protocol for
borrowers and certain others to obtain
payoff demand statements from
existing lenders and secure a timely
lien release following a responsive
tender. (Civ. C. § 2943) For traditional
mortgages, the protocol increases
transactional efficiencies and reduces
disputes in refinance and sale escrows.
Generally, it provides a formal
process for borrowers, property
buyers, new lenders, and certain other
interested stakeholders, and their
respective agents, to request a payoff
demand statement from a borrower’s
secured creditors and requires the
creditors to respond to such requests
with a payoff demand statement
within 21 days. (Civ. C. § 2943) If the
creditor receives full payment during
the effective period of the payoff
demand statement, it has 21 days to
instruct the trustee of the deed of trust
securing the obligation to release the
lien. (Civ. C. § 2941(b)(1)) Thereafter,
the trustee has 30 days to honor the
instruction by executing and recording
a full reconveyance of deed of trust.
(Civ. C. § 2941(b)(1)(A))
Section 2943’s Deficiency: HELOC
Cancellations
As comprehensive and successful
as the existing statutory payoff
scheme is, it does not provide
assistance with certain practical
realities created by secured revolving
credit facilities, including HELOCs.
HELOC loan agreements provide
borrowers with the ability to draw
down and repay all or a portion of
a credit limit at-will. In order for a
borrower to terminate the credit
facility, HELOCs typically require the
borrower to provide the creditor with
(1) an express written cancellation
notice and (2) a tender of the
current balance. Such a cancellation
notice allows a HELOC creditor to
differentiate between a borrower’s
intent to payoff the credit facility from
merely paying down the balance. This
is significant because the former serves
to terminate the HELOC while the
later keeps it open and available for
future draws by the borrower.
One typical example of where
problems develop under the current
statutory scheme is where a HELOC
creditor receives a request for a payoff
demand statement and a full-balance
tender consistent with a responsive
payoff demand statement, but does
not receive a written cancellation
notice. Without the contractually
required cancellation notice, creditors
often assume the tender is merely
a pay-down, not a payoff and
cancellation. (Such an assumption
is consistent with the reality that
sometimes borrowers request payoff
demand statements as an exploratory
exercise and/or pending refinance or
sale escrows are sometimes aborted
or otherwise fail.) Thereafter, the
refinance or sale escrow successfully
closes, but either before or after the
closing, the borrower makes new
draws on the HELOC. Naturally, such
a set of events almost always results
in a priority dispute between the new
lender and/or owner, on the one hand,
and the pre-existing HELOC creditor,
on the other hand. It also creates
potential exposure for the escrow
agent and new title insurer.
Legislative Solution: AB 1770
Assembly Bill 1770 aims to resolve
this issue and creates Civil Code
section 2943.1.
The bill provides a statutory
mechanism to (1) suspend further
CONTINUED ON PAGE 35
Residential
Legal
FALL 201418
The Full Credit BidAvoiding (Expensive) Unintended Consequences
BY SCOTT D. ROGERS, PARTNER, & THEODORE K. KLAASSEN, SENIOR COUNSEL, RUTAN & TUCKER
Foreclosing real estate lenders are
often surprised to learn that their “full
credit bid” at a trustee’s foreclosure
sale has had expensive unintended
consequences. In the recent California
case of Najah v. Scottsdale Insurance
Company, 230 Cal.App.4th 125 (2014),
a full credit bid prevented the lender
from recovering insurance proceeds for
pre-foreclosure damage to the security
property. To avoid this and other
unintended consequences, lenders
are well-advised to understand the
legal import of a full credit bid and to
develop a comprehensive bid strategy
in advance of the trustee’s sale.
Under California law, a foreclosing
lender is permitted to credit bid at the
foreclosure sale any amount due to the
lender with respect to the defaulted
loan. This avoids the inconvenience of
a foreclosing lender having to pay cash
at the foreclosure sale only to have the
money delivered back to the lender.
The amount credit bid is treated the
same as if the lender had bid and
paid cash. A “full credit bid” occurs
when a lender credit bids the sum of
all amounts owed to the lender at the
time of sale, typically including all
unpaid principal, accrued interest, late
charges, advances, foreclosure costs,
legal fees and other sums due. As the
amount credit bid is treated the same
as cash, when a foreclosing lender
obtains title as the result of a full credit
bid, the indebtedness to the lender is
generally deemed to have been paid in
full—the “full credit bid rule.”
In the Najah case, Najah and
Akhavain (together, Najah) sold a
commercial property to Orange Crest
Realty Corporation (Orange Crest)
taking back a second deed of trust
to secure $2,550,000 of the purchase
price. After Orange Crest defaulted
under both deeds of trust, Najah
purchased the senior debt and deed
of trust, presumably to avoid having
their second deed of trust wiped out
if the first lienholder foreclosed. Najah
then instituted foreclosure proceedings
under the second deed of trust and
reacquired title to the property by
making a full credit bid of the amounts
owed under the second deed of trust
($2,878,000) at the trustee’s sale.
After getting the property back
through the trustee’s sale, Najah
brought suit against Scottsdale
Insurance Company (Scottsdale) to
collect under a commercial general
liability insurance policy issued to
Orange Crest covering the property
and naming both the senior lender and
Najah as insured mortgage holders.
Prior to the foreclosure sale, the
property had been vandalized and
many of its fixtures removed by the
principal owner of Orange Crest. The
estimated cost to repair the property
exceeded $500,000, which Najah
hoped to recover from Scottsdale.
When Scottsdale would not pay
Najah’s claim, Najah sued, and the
trial court ruled in favor of Scottsdale
and denied Najah any recovery. Najah
appealed, and the appellate court
affirmed the trial court’s judgment in
favor of Scottsdale. The appellate court
held that Najah’s full credit bid at the
foreclosure sale under the second deed
of trust precluded Najah from making a
claim on the proceeds of the Scottsdale
insurance policy. The appellate court
found that the amount payable to
Najah under the insurance policy was
limited to the amount necessary to
satisfy the debt and that because the
debt was fully satisfied through the full
credit bid, Najah had no further claim
on any insurance proceeds.
According to the appellate court,
the purpose of requiring the trustee’s
sale to be a public auction is to resolve
the question of value of the foreclosed
property through competitive bidding
at a public sale. This gives any
member of the public an opportunity
to participate in setting the value for
the property. This public value setting
provides some degree of market
protection (and transparency) for those
CONTINUED ON PAGE 36
Commercial
Legal
CALIFORNIA MORTGAGE FINANCE NEWS 19
New Markets Tax Credits
Financing OpportunitiesBY BRIAN L. HOLMAN, PARTNER, & ROBERT M. ZELLER, PARTNER, MUSICK PEELER & GARRETT LLP
Mortgage Bankers looking for a
new source of financing for projects
located in low and moderate
income communities may want to
inquire whether financing may be
available through participation in
the federal New Markets Tax Credit
(NMTC) program. Projects that
may qualify for such loans include
educational facilities, commercial
offices and retail centers, mixed use
(commercial/residential) properties,
community centers, entertainment /
cultural facilities, and health-related
facilities. This article describes the
NMTC program and how an NMTC
transaction may assist in funding the
acquisition and development of a real
estate project in a low or moderate
income community.
What is the New Markets Tax Credit?
The New Markets Tax Credit
program is intended to spur
investment of private capital into
a range of privately-managed
investment vehicles that make loans
and equity investments in businesses
operating in low- or moderate-income
areas. By making an equity investment
in a subsidiary of an eligible
“community development entity”
(“CDE”) which has been awarded an
allocation of New Market Tax Credits
Commercial
CONTINUED ON PAGE 37
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FALL 201420
EXECUTIVE DIRECTOR CONTINUES FROM PAGE 5
Look to Kinecta – Standing strong for over 70 years.
NMLS (Nationwide Mortgage Licensing System) ID: 407870. Information is intended for Mortgage Professionals only and not intended for consumer use as defined by Section 1026.2 of Regulation Z, which implements the Truth-In-Lending Act. The guidelines are subject to change without notice and are subject to Kinecta Federal Credit Union underwriting guidelines and all applicable federal and state rules and regulations. Kinecta Federal Credit Union is an FHA Approved Lending Institution, and is not acting on behalf of or at the direction of HUD/FHA or the federal government. Availability of some loan products may vary in some states/counties and loan limits may apply. Certain loans available to $3.5MM on exception. 14568-05/14
Kinecta Federal Credit Union – a 70-year tradition providing a range of loan products and a dedication to service.
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The mortgage industry has been weathering stormy waters in recent times. Many lenders have significantly reduced their product offerings… some have even abandoned ship. You need a partner that you can count on to stay the course.
Kinecta has been standing strong since 1940 and is one of the nation’s largest credit unions. Our solid financial foundation allows us to provide a full array of mortgages to our broker partners. Ranging from conventional, government, jumbo, and even niche product offerings, Kinecta gives you options that will help you find the right mortgage solution for clients.
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point for the association, whether
it is in the form of a conference,
webinar, or article. One of the major
elements of our mission continues
to be the dissemination of critical
industry information being provided
by leading experts and nationally
recognized professionals.
As we bring 2014 to a close, I
invite you to stay tuned for what’s
in store for the California MBA in
2015 and beyond! You will see some
exciting changes and additions that
will take us into our next decade of
service to the industry. If the mortgage
industry has been one in which you’ve
built your career then I invite you to
join your colleagues as well as those
who’ve blazed the trail for you along
the way, and be an active part of this
association. Support the organization
that supports you and your business!
•
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(@CAMortgBankers) on Twitter
to get the latest updates on
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and conference and event info!
CALIFORNIA MORTGAGE FINANCE NEWS 21
convicted of knowingly recording or
filing a false or forged real property
instrument in any public office within
the state, the criminal court must
issue a written order that the false or
forged instrument be adjudged void
ab initio. The measure is designed to
help a homeowner or business who
has been victimized by false or forged
deeds by providing an alternative to
requiring the victim to go to civil court
for a ‘quiet title action’ at their own
expense. CMBA had concerns with
the original version of the bill because
it did not protect the rights of a good
faith transferee or obligee relative to
their interest in the real property and
their ability to enforce any obligation
incurred or secured by the underlying
property. CMBA worked with the
author of AB 1698 and the law
enforcement sponsors of the measure
to craft amendments resolving CMBA’s
concerns. The amendments provide
multiple notices to interested parties in
the real property regarding the actions
being taken by the criminal court and
provide the opportunity for those
parties to argue their position in court.
AB 2416—Employee Wage Liens on
Employer Property
On the Floor of the Senate.
AB 2416 would have allowed
an employee to place a lien for any
wages, other compensation, and related
penalties and damages owed to the
employee on the employer’s real and
LEGISLATIVE REPORT CONTINUES FROM PAGE 7
CONTINUED ON PAGE 23
December 8, 2014California MBA Legal Issues ConferenceWestin South Coast Plaza, Costa Mesa, CARegister Now at www.CMBA.com!
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FALL 201422
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CALIFORNIA MORTGAGE FINANCE NEWS 23
NEW MEMBERS
Welcome New MembersWelcome to the CMBA family!
CHERRYWOOD COMMERCIAL, LLCVictor DominguezDiamond Bar, CACommercial/Multi-Family Mortgage Banker
DEEPHAVEN MORTGAGE, LLCBrett J. HivelyCharlotte, NCResidential Mortgage Banker
THE PRIESTON GROUPLynette NelsonNovato, CAIndustry Professional Advisor
LEGISLATIVE REPORT CONTINUES FROM PAGE 21
personal property, including property
upon which the employee bestowed
labor. The amount of the lien includes
alleged unpaid wages or compensation,
penalties and damages available under
the Labor Code, interest at the same
rate as for prejudgment interest in this
state, and the costs of filing and service
of the lien. The lien attaches to all real
property owned by the employer at
the time of the filing of the notice of
lien, or that is subsequently acquired
by the employer, that is located in any
county in which the notice of lien is
recorded. The lien was originally a
super-lien, which was one of CMBA’s
main concerns with the bill, but the
super-lien provision was removed. The
lien, however, would still have applied
to unsecured loans and non-purchase
mortgage loans made on or after
January 1, 2016. In addition to removing
the super-lien provision, the author
exempted an employer’s principal
residence from coverage by the bill and
included a mechanism to enable an
employer to remove the wage lien in
certain circumstances. CMBA opposed
AB 2416, and it died in the Senate.
AB 1770—Termination of Equity
Lines of Credit
Chaptered by Secretary of State—
Chapter 206, Statutes of 2014.
AB 1770 creates a statutory
method for suspending and closing
a home equity line of credit by way
of a codified notice signed by the
borrower(s) and transmitted by an
entitled person (i.e. title company)
to the beneficiary (lender). CMBA
participated in extensive negotiations
with title industry representatives,
policy makers and legislative staff
to address CMBA concerns with
the original proposal and to reach
a compromise on the final version
of the bill that was signed into law.
This legislation is intended to reduce
litigation between lenders and title
companies that has been occurring
when lines of credit are not terminated
when real property changes
ownership. The bill also includes a
July 1, 2015 delayed effective date, a
July 1, 2019 sunset date for the statute,
and a statement that the beneficiary
may conclusively rely on the
borrower’s instruction to suspend and
close the equity line of credit provided
by the entitled person.
AB 2372—Property Taxation:
Change in Ownership
In the Senate Appropriations
Committee.
AB 2372 would have required
that when more than 90% or more
of the direct or indirect ownership
interests in a legal entity are
cumulatively transferred in one
or more transactions, the assessor
should reassess the property owned
by the legal entity as a change in
ownership, regardless of whether a
single individual acquires more than
50% of the ownership interest. The
bill specifically excluded from its
reassessment requirements publicly
traded entity stock sales. It also
specified that multiple transfers
of the same ownership interest be
counted only once in determining
whether cumulatively 90 percent
or more of the ownership interests
have transferred. AB 2372 applied to
ownership interest sales made on or
after January 1, 2015. CMBA and most
business groups did not oppose the
final version of the bill, and some, like
the California Chamber of Commerce
supported the bill as amended and
narrowed. Provisions initially of
concern to CMBA were amended
out of the final version of the bill.
Interestingly some of the consumer
tax groups that initially supported the
measure removed support or opposed
the final bill version because they did
not believe the tax provisions went
far enough on the split-roll issue. This
CONTINUED ON PAGE 24
FALL 201424
LEGISLATIVE REPORT CONTINUES FROM PAGE 23
controversy led to the bill dying in the
Senate Appropriations Committee.
AB 1513—Possession by
Declaration of Residential Property
Chaptered by Secretary of State—
Chapter 666, Statutes of 2014.
AB 1513 establishes a three
year pilot program until January 1,
2018 to facilitate removal of persons
unlawfully occupying residential
property that, pursuant to the
program, has been registered with and
verified by local law enforcement to
be vacant. The bill was sponsored by
the California Association of Realtors
and seeks to provide property owners
with an additional tool to enforce
criminal trespass laws in cities where
the so-called practice of “squatting”
by unauthorized occupants in
residential property poses a problem
to the community at large. The pilot
program applies to residential property
of one to four units, with the Cities of
Palmdale, Lancaster, and Ukiah named
as the initial cities to participate in the
program. The bill does not mandate
registration of a vacant property.
Originally the bill would have created
a felony crime for refusal to leave a
property that could have negatively
impacted servicers maintaining a
property presumed to be vacant, but
that language was removed after the
CMBA voiced concerns.
•
lenders are now working together to
provide more competitive terms. For
example, many senior lenders that
specialize in a certain product or loan
type are now partnering with junior
lenders to provide higher leverage to
get deals done.
By working with a lender or
combination of lenders with a specific
niche, mortgage brokers are better
positioned to receive quality service
and certainty of execution.
However, brokers should also be
cautious. Many new, inexperienced
lenders have entered the marketplace
in search of yield. The returns from
hard money lending are higher than the
returns these new lenders could achieve
by investing in properties. The fact is,
with sub 5 percent cap rates in many
primary markets, it is more profitable to
lend capital than it is to invest it. Many
of these new lenders have never lent
money before, and don’t have the same
experience and expertise as seasoned
companies. For this reason, it’s extremely
important for brokers and borrowers to
be diligent when seeking a new lender.
With so many new lenders
offering low rates and high leverage in
a specific niche, it’s vital that mortgage
professionals conduct careful due
diligence to find established lenders
who have a strong track record
in providing speed, service, and
assurance that their loan will close.
Creative Office Space is Hot,
Residential Investment is Cooling Off
In the current market, value-add
and development opportunities are
still in favor, while smaller residential
flips are becoming less common.
Specifically, creative office space is
increasingly becoming the hot product
type, especially as millennials become
more dominant in the workforce. As
a result of this increased demand,
commercial lenders are finding new
opportunities to expand their client
base and increase deal flow.
Alternatively, there is less
opportunity in residential investment
than in previous years. There is
significant activity in the high-end
home market, but many investors
are beginning to feel that the profit
margins may be narrowing. Mortgage
professionals should prepare themselves
now for a time when residential flips
will become less desirable for investors.
New Markets Emerging and
Development Activity Increasing
While foreign investors continue
to flock to primary markets such as Los
Angeles and San Francisco where they
are rapidly acquiring high-end homes
and multifamily product, many other
investors are looking for new options.
There is limited inventory of
quality product in primary markets
and cap rates have been compressed
to historic lows. Many investors are
migrating to secondary and tertiary
markets in search of yield.
In addition, construction and
development is stronger than ever. This
trend will continue as developers and
investors continue to have access to an
abundance of capital. Overall, developers
are extremely bullish right now. This
fact will make it very interesting to see
how the market reacts to all of the new
product being delivered in 2015.
•
COMMERCIAL NEWS CONTINUES FROM PAGE 9
CALIFORNIA MORTGAGE FINANCE NEWS 25
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that, because they are in the “cloud,”
and accessible electronically through
privately controlled means (e.g.
private smart phones, tablets, home
computers), or otherwise outside
the immediate physical premises
and obvious control of the lender,
social media somehow exist in a
“Kings X” universe exempt from the
legal and regulatory restrictions and
accountability otherwise applicable
to a lender’s business activities. In
mortgage banking, these mistakes
most often show up in the form
of personal advertising on private
websites—which may not be
vetted by lenders and is often in
violation of applicable regulations—
or in embarrassing photographs,
videos, comments, “rants,” or other
communications mistakenly thought
to be “private,” but which reflect badly
on the lender/employer or otherwise
breach some legal duty owed by the
lender or employee including, but
certainly not limited to, obligations
to maintain and protect the privacy
and confidentiality of borrower (and
lender) transactions and information.
Q: How important is it for
companies to put systems in place to
manage their social media presence?
Can you afford to just reduce your
social media footprint instead?
Klika: Unless you are a very small
company, attempting to minimize or
reduce your social media footprint
will be an uphill battle and likely
unsustainable. Even if you were able
to accomplish this, thereby reducing
your compliance risk, it may not
make good business sense. More and
more people go online to “google”
service providers, including lenders.
It’s all about having the right balance;
having controls in place and educating
employees on the correct way to
use social media, while still allowing
them to market themselves and, the
company, using social media.
It will be difficult for any lender
to administer an effective social
media compliance program without
the proper resources and tools to
manage it. A company’s executive
management must support the
program by devoting appropriate
personnel resources to the cause.
However, staffing alone may not
always be enough. More and more
third party service providers are
ROUNDTABLE ARTICLE CONTINUES FROM PAGE 10
CONTINUED ON PAGE 26
FALL 201426
taking note of this and developing
software products to assist heavily
regulated industries such as mortgage
finance with managing social
media compliance. The increasing
competition in this space is also
making these options more affordable
than in the past. Depending on a
lender’s size and how social media
is being utilized, these tools can be
critical to helping a company monitor
their exposure across multiple social
media platforms and addressing
certain regulatory requirements like
record retention.
Pfeifer: From the standpoint
of legal risk exposure and company
reputation, it is absolutely essential
for companies to put such systems
in place. Social media are now or
fast becoming the principal venues
of commerce and, unless lenders
manage their presence and activities
in such venues, their competition—or
the regulators—will do it for them.
Moreover, the multiplicity of sites and
their nearly universal accessibility,
combined with the creative variety
of ways in which these various
sites facilitate communications and
interaction, require a systematic
approach that has to consist of
much more than a few rules in
a P&P manual sitting on a shelf
somewhere. Lenders need to be “on”
the sites, if not as participants, then
at least as monitors of the activities
of their employees. This requires
appropriate tools, personnel and
management support, and may
necessitate the assistance of third
party software products or services.
I personally believe that simply
reducing a company’s “social media
footprint” is not a viable solution to
the risks posed by social media, but a
prescription for the lender’s economic
and competitive suicide.
Cannon: As we all can attest,
compliance risks are perhaps the
greatest risks facing lenders today.
While establishing policies and
procedures, training programs,
and ongoing monitoring processes
are necessary in order to craft a
compliant social media program,
these activities should be part of
the lender’s larger compliance
management system (“CMS”).
Regulators have come to expect to see
a culture of compliance throughout
the lender’s operations, not just a
narrowly focused program targeted to
one aspect of its operations.
Thus, while it is critical to
establish compliance programs for
social media, it may not be necessary
to expend more resources in this area
than in other areas. Further, the social
media compliance program should
be current, complete, effective, and
commensurate with the entity’s size
and risk profile. Of course, lenders will
always face competitive pressures to
expand their social media offerings,
and remaining out of the social
media space may not necessarily
be an option for some lenders. But
the benefits of using social media to
advertise and attract business should
be weighed against the risks.
Q: What are the key points
that regulators focus on when
examining a company’s social
media compliance?
Pfeifer: The principal focus
of mortgage banking regulators is
consumer protection and, secondarily,
enterprise safety and soundness. In
managing their social media presence,
lenders therefore need to evaluate
every social media activity and
communication from the standpoint
of its impact on consumers and the
economic viability of the lender. The
FFIEC’s Social Media Guidance (78
Fed. Reg. 76297 Dec. 17, 2013) is an
essential starting point in building
any compliance program and is
bound to become the foundation
of examination protocols for both
state and federal regulators. As set
forth in that Guidance, the list of
federal statutes and regulations
with provisions applicable to social
media activity is daunting: UDAAP,
FDIC and NCUA advertising rules,
RESPA, TILA, ECOA/FHA, FDCPA,
BSA/AML, Payment Rules (EFTA,
NACHA), Community Reinvestment
Act, GLBA Privacy and Data Security,
COPPA, CAN-SPAM and TCPA,
and FCRA. And this list does not
even include applicable provisions
of state law (including state UDAP
statutes), licensing rules like the SAFE
Act, media site platform rules and
terms of use, state and federal rules
governing sweepstakes, contests, and
other promotions, copyright laws,
defamation rules, securities laws, and
even civil litigation procedural rules
such as litigation and discovery holds
and evidence preservation rules. The
closer one looks at what is required for
adequate management of social media
risks, the more there is to see.
ROUNDTABLE ARTICLE CONTINUES FROM PAGE 25
CONTINUED ON PAGE 27
CALIFORNIA MORTGAGE FINANCE NEWS 27
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Cannon: As with any aspect of a
lender’s operations, the lender’s social
media compliance program will likely
be examined to determine whether
it is integrated into the lender’s larger
CMS. When the CFPB (or, likely,
another regulator) examines a financial
institution such as a mortgage lender,
it will be looking for the lender’s CMS.
While no federal statute or regulation
specifically mandates that a lender
implement a CMS, the CFPB expects
every entity it supervises to have an
effective CMS adapted to its business
strategy and operations.
Consumer protection is the
overt purpose of the CFPB, and the
CFPB has emphasized that regulated
entities need to have the ability
to detect, prevent, and remedy
practices that may harm consumers.
The CFPB expects consumer
protection to be one of a lender’s top
strategic and cultural imperatives,
receiving the same emphasis as
operational considerations. The
CFPB intends for lenders to move
beyond mere technical compliance
and consider the impact of all of
their actions on consumers.
As such, when examining a
lender’s social media compliance, the
regulator will likely look for technical
compliance with, for instance, TILA’s
rules on mortgage advertising, the
FTC’s Mortgage Acts and Practices—
Advertising rule, as well as the Social
Media: Consumer Compliance Risk
Management Guidance issued by
the Federal Financial Institutions
Examination Council (FFIEC). But it
will also likely look more holistically
to ensure that social media materials
are not, for instance, inaccurately
representing the products and
ROUNDTABLE ARTICLE CONTINUES FROM PAGE 26
CONTINUED ON PAGE 28
FALL 201428
services and that social media
postings are not improperly targeting
or excluding a particular protected
class of consumers.
Klika: Regulators expect that
a lender will have a social media
compliance program which adequately
addresses its particular risk factors
(for example size and product lines).
The FFIEC’s Consumer Compliance
Risk Management Guidance is not
only a great resource for this purpose,
it is a “must read” when creating or
updating your program. Your social
media compliance program should
be comprehensive enough to cover
the various elements addressed in
this guidance (governance, policies
and procedures, training, etc.)
commensurate with your company’s
risk factors.
Finally, keeping your policy up
to date and ensuring it addresses
the latest and greatest social media
platforms that your employees may be
using is a must. Personally, you may
have little interest in virtual worlds
like Second Life, but you may need to
know if you have “avatars” offering
mortgage products to other “residents”
on the “grid”…good luck!
•
ROUNDTABLE ARTICLE CONTINUES FROM PAGE 27
Have you updated your
Membership Directory listing?
One of the benefits of your CMBA
membership is inclusion in our
online Membership Directory—
make sure your company’s info is
up to date! Email [email protected]
for more information!
CALIFORNIA MORTGAGE FINANCE NEWS 29
2955 Main Street, 2nd Floor, Irvine, CA 92614 F T: (949)720-9200 F F: (949)608-0133 F [email protected] F www.wolffirm.com
We can’t stop the wave from crashing, but we can help you surf it.
Our Services:
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CALIFORNIA MORTGAGE BANKERS ASSOCIATION
THE VOICE OF REAL ESTATE FINANCE
borrowers apparently never received
such a letter. Flagstar also frequently
miscalculated borrower income,
leading to improper loan modification
denials, among other things. Flagstar
also allegedly violated the MSFR in
various ways, including by deficiently
acknowledging new applications, failing
to make decisions within specified time
periods, and failing to notify certain
borrowers of their right under the MSFR
to appeal.
The CFPB filed no formal lawsuit
against Flagstar. Rather, it prosecuted
an administrative proceeding under
the CFPA, and the penalties imposed
by the CFPB were severe. As noted
above, $37.5 million was assessed
against Flagstar, comprised in part
of damages, and in part of penalties.
Specifically, Flagstar was required to
pay $27,500,000 in damages to the
CFPB, of which $20,000,000 was to be
distributed to foreclosed consumers,
and it was required to pay an additional
$10,000,000 civil penalty to the CFPB’s
Civil Penalty Fund. Flagstar was
also prohibited from deducting this
penalty from its taxes or seeking any
other indemnification. Flagstar was
also prohibited from buying the right
to service or sub-service any more
defaulted loans until it could implement
a CFPB-approved compliance plan in
connection with the Consent Order.
Flagstar was also required to implement
certain “fast-track” review procedures
for pending applications before it could
foreclose on delinquent borrowers,
and was required to undergo a detailed
compliance review in coordination
with the CFPB, wherein its Board was
required to develop a compliance plan,
which the CFPB would have to approve.
Finally, Flagstar also agreed to: (1)
two years of monitoring, (2) deliver
a copy of the Consent Order to all
in the next five years who would be
responsible for providing services
relating to the subject matter of
the Consent Order, and (3) keep all
documents relating to its compliance
with the Consent Order for at least
five years.
The two most significant aspects
of the relief secured by the CFPB are
the amount of the damages/penalty
assessed against Flagstar, but also the
ban on its acquisition of new mortgage
servicing rights on defaulted loans
pending its certified compliance with
FLAGSTAR BANK CONTINUES FROM PAGE 13
CONTINUED ON PAGE 30
FALL 201430
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CFPA and MSFR requirements. The
CFPB’s approach to Flagstar and the
nature of the relief it secured appears
to reflect a new tactic. Many mortgage
loan servicers depend upon a steady
stream of new loans, particularly
defaulted loans, because they either
originate no loans of their own, or
originate very few. While a damages
award or a penalty might be painful,
it does not necessarily interfere with
the ongoing business of a servicer. The
prohibition on Flagstar’s acquisition of
new servicing rights, however, operates
as a powerful “penalty box” that could,
theoretically, substantially compromise
a mortgage servicer’s business model
and future prospects in an important
part of the market.
Thus, the CFPB’s ability and
willingness to exercise this “penalty
box” remedy is significant, particularly
given that it could be applied to other
businesses over which the CFPB has
enforcement jurisdiction as well.
Mortgage servicers and other businesses
regulated by the CFPB should be on
notice that, at least currently, the CFPB
is willing and able to apply substantial
pressure to advance its consumer
protection mandate. The penalties
imposed on Flagstar serve as a dire
reminder of the potential consequences
of a failure to comply with evolving
consumer protection laws.
•
FLAGSTAR BANK CONTINUES FROM PAGE 29
CALIFORNIA MORTGAGE FINANCE NEWS 31
1901 Camino Vida Roble, Suite 115, Carlsbad, CA 92008 ● (877) 654-6824 www.thecompliancegroup.net
Court in at least one—Segura v. Wells
Fargo Bank, N.A.8—applied it to deny
the servicer’s motion to dismiss a
negligence claim, specifically noting
that while it was “sympathetic” to the
servicer’s position it “must be directed
by California law as established by
California courts.”9
While the full impact of Alvarez is
yet to be seen, the seemingly-divergent
positions of California’s appellate
districts, and the federal courts’ efforts
to follow (and perhaps shape) the state
law, should be carefully monitored
by servicers as this area of the law
continues to change and unfold.
•
1 (2014) 228 Cal.App.4th 941.
2 Nymark v. Heart Fed. Savings & Loan Ass’n
(1991) 231 Cal.App.3d 1089, 1096.
3 (2013) 213 Cal.App.4th 872.
4 (2013) 221 Cal.App.4th 49.
5 See, e.g., Maomanivong v. Nat’l City Mortg.
Co., 2014 U.S. Dist. LEXIS 130513 (N.D.
Cal. Sept. 15, 2014); Becker v. Wells Fargo
Bank N.A., Inc., 2014 U.S. Dist. LEXIS
109287 (E.D. Cal. Aug. 7, 2014); Gopar
v. Nationstar Mortg., LLC, 2014 U.S. Dist.
LEXIS 54420 (S.D. Cal. Apr. 17, 2014).
6 Garcia v. Ocwen Loan Servicing, LLC, 2010
U.S. Dist. LEXIS 45375 (applying six-
factor test in Biakanja v. Irving (1958) 49
Cal.2d 647, 650, to determine whether
a duty of care should be imposed, with
the factors being: [1] the extent to which
the transaction was intended to affect the
plaintiff, [2] the foreseeability of harm to
him, [3] the degree of certainty that the
plaintiff suffered injury, [4] the closeness
of the connection between the defendant’s
conduct and the injury suffered, [5] the
moral blame attached to the defendant’s
conduct, and [6] the policy of preventing
future harm.).
7 See, e.g., Colom v. Wells Fargo Home Mortg.,
Inc., 2014 U.S. Dist. LEXIS 148856 (N.D.
Cal. Oct. 20, 2014); Curl v. CitiMortgage,
Inc., 2014 U.S. Dist. LEXIS 148055 (N.D.
Cal. Oct. 17, 2014).
8 2014 U.S. Dist. LEXIS 143038 (C.D. Cal.
Sept. 26, 2014).
9 Id. at *31.
“NEGLIGENT LOAN SERVICING” CONTINUES FROM PAGE 14
FALL 201432
note and senior deed of trust. Then
Najah instituted its own non-judicial
foreclosure of the second deed of
trust and entered a credit bid for the
full amount owed on the junior deed
of trust, $2,878.060.25. Najah was
the highest bidder and took title to
the property, after which he brought
suit to collect under the property’s
insurance policy for damage allegedly
done by the borrower.
The trial court ruled in favor of
the insurance company, reasoning
that Najah’s purchase of the first note
for full value extinguished the debt
secured by the first deed of trust. See
Najah, 230 Cal.App.4th at 135 fn. 13.
As the appellate court recognized, the
trial court’s reasoning was incorrect—
interests are freely assignable without
extinguishing the obligations—
however it raises the question of
whether the trial court was attempting
to apply one of the two merger
doctrines that are often discussed in
these situations: merger of title, and
merger of rights.
Under the doctrine of merger of
title, “When a greater and lesser estate
coincide and meet in one and the same
person, in the same right without
any intermediate estate, the latter is
in law merged in the greater.” 10 Cal.
Jur. 606. In the present matter, Najah
had a lienholder’s interest against the
property he owned, thus the lesser
interest (lienholder) merged into the
greater interest (property owner).
Application of the merger of
rights would have the same result.
When property is sold via non-judicial
foreclosure, the purchaser buys
the property subject to any senior
interests—in this case, the first deed of
trust. Although not personally liable
for the obligations secured by the first
deed of trust, if the purchaser does not
pay the obligations, the beneficiary of
the first may foreclose. In the case at
issue, Najah steps into the shoes of the
original borrower and is responsible
to repay the first-position obligation.
But because Najah now owned both
the property and the first deed of trust,
in essence he owed the obligation
to himself. Thus, the rights of Najah
merge as owner of the property and
under the first deed of trust secured
against the same property.
The appellate court found that
because Najah made a full credit bid,
he was prohibited from collecting
anything further on either the first or
second. To understand the application
of the full credit bid rule, one must
keep the merger doctrines in mind
along with the stated purpose for a
non-judicial foreclosure: “to resolve
the question of value … through
competitive bidding…” Cornelison v.
Kornbluth, 15 Cal.3d 590 (Cal.1975).
When Najah bid the entire amount
owed on the second deed of trust
($2,878.060.25) he was prohibiting
anyone else from bidding less than
$4,627,000.00, as whomever bid
more than his credit bid would
buy the property subject to the
first deed of trust which was owed
$1,749,000.00. Thus, Najah’s bid
established the value of the property
as $4,627,000.00. Again, implicit
in the court’s application of this
doctrine is that a junior’s full credit
bid establishes the total indebtedness
owed on the first and second, which
equals the value that Najah placed on
the property. Thus, by becoming the
successful purchaser of the property,
the property satisfied what Najah was
owed. If Najah had been made whole
by the property, then allowing him to
recover additional money under the
insurance policy would be a windfall.
So, what is a secured creditor to
do when it holds interests in both
the first and second deeds of trust?
To assess all the possible variations
is beyond the scope of this article.
Should the creditor underbid the
junior interest? This could work,
but under a strict merger analysis, if
the property reverted to the creditor
there would be nothing left to collect.
Should the creditor instead foreclose
first on the senior, as they typically
do? This option also may limit
collection options by invoking the
sold-out junior doctrine. What about
judicially foreclosing both interests
at the same time? It may preserve
the creditor’s right to a deficiency
but would take substantially longer
and cost more. What about bidding
10% less the lessor of the fair market
value and the total indebtedness?
Obviously, there are options,
however it is uncertain how a court
may respond and what justification
they will use. What is clear, is that
a creditor facing this dilemma must
craft a specific game plan to maximize
their recovery; a one-size-fits-all
approach to bidding and foreclosing
may have unintended consequences.
•
FORECLOSING A JUNIOR DEED OF TRUST CONTINUES FROM PAGE 15
CALIFORNIA MORTGAGE FINANCE NEWS 33
proactive steps to mitigate the risk of
having their deed of trust or mortgage
being wiped out in a foreclosure sale?
To develop a mitigation plan, it is
important to first understand the scope
of the state’s super lien priority statute.
The statutes in some states arguably
create a super lien priority as to payment
only, and not as to lien position. And
some state statutes do not apply to
all common interest developments.7
Finally, some states require the HOA to
deliver notice of its foreclosure to junior
lienholders, while others do not.
Using Nevada as an example, a
lender may record a request to receive
a notice of default filed by an HOA (a
“Request”). The Request must state
the name and address of the person
recording the Request and identify the
deed of trust by stating the names of the
parties to the deed of trust, the date of
recordation, and other information. The
person recording a Request must have or
claim an interest in, or lien on, the real
property described in the deed of trust.8
And the Request must identify the lien
by stating the names of the unit’s owner
and the common-interest community.9
These requirements pose potential
traps for the unwary. If MERS is the
mortgagee of record, should the Request
reflect that notice is to go to MERS, or
to the assignee of the mortgage loan?
Even if it is acceptable to name MERS,
and MERS forwards to the current
servicer any notices MERS receives, will
the notice make it to the right person at
the servicer? Some commentators have
suggested recording (a) an assignment of
the deed of trust that reflects the current
note holder, and (b) a Request naming the
servicer as the servicing agent for the note
holder under a power of attorney, and
NEVADA HOA DECISION CONTINUES FROM PAGE 16
CONTINUED ON PAGE 34
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FALL 201434
specifying the appropriate department
within the servicer’s operations.
These are not the only issues. The
Request is supposed to reflect the owner’s
name, but what if the owner is not the
borrower? And how does the servicer
know the correct name and address of
the HOA, unless the originating lender
NEVADA HOA DECISION CONTINUES FROM PAGE 33
has obtained this information?
Another option that has been
discussed is to require the borrower
to escrow for payment of HOA
assessments. But this too poses practical
issues. How can a lender determine if
there is an HOA involved that imposes
assessments? Does state law and the
terms of the deed of trust or mortgage
permit or prohibit escrows for HOA
assessments? How can a servicer keep
updated information on the HOA
assessments, and ensure that payments
the servicer makes go to the correct
address for the HOA?
What happens if a servicer
learns of an HOA that has initiated
a foreclosure? A servicer might ask
the HOA for a statement of the super
priority lien amount so the servicer
can cure the default, but some HOAs
will not accommodate these requests
on the theories that the servicer is
not a party that is entitled under state
statute to receive payoff information,
or that providing a servicer with that
information would violate the Fair Debt
Collection Practices Act. If an HOA
does respond to the servicer’s request,
the response might be a statement of
the entire lien amount (e.g., 24 months
of assessments), and not just the super
priority lien amount (e.g., 9 months).
What should the servicer do in these
instances? There is no clear answer.
Some have suggested that to avoid a
foreclosure the servicer should pay
the entire lien amount, and then seek
judicial relief.
It’s interesting to note that in spite
of the public policy outcry over servicers
foreclosing on large liens without
engaging in adequate loss mitigation,
HOAs can foreclose on very small liens
with no similar concerns.
In any event, there are many
questions with no clear answers. Until
these issues are sorted out, lenders and
servicers are well advised to consult
with their counsel to address each of
these issues on a state-by-state basis.
•
1 SFR Investments Pool 1, LLC, Appellant v.
U.S. Bank, N.A., 130 Nev. Adv. Op. 75
(Sept. 18, 2014).
2 As just one other example, on August
28, 2014, in the case of Chase Plaza
Condominium Association, Inc. and Darcy, LLC
v. JPMorgan Chase Bank, N.A., Nos. 13-CV-
623 & 13-CV-674 (D.C. App. 2014), the
District of Columbia Court of Appeals held
that a lien for delinquent condominium
assessments recorded in 2008 had “super
priority” status over a lender’s deed of trust
recorded in 2005.
3 Nev. Rev. Stat. § 116.3116.
4 A common interest community or
development (“CID”) is a form of real
estate which is subject to a declaration
and administered by an association (such
as an HOA) where each owner holds
exclusive rights to portions of the property
(typically called a unit), and shared rights
to portions of the property (typically called
the common area). There are many forms
of CIDs, including condominiums and
planned unit developments.
5 There are approximately 23 states that
have adopted some version of these
uniform laws that provides super priority
lien status.
6 Purchasers at HOA lien sales can have
difficulty selling the property since title
insurers are often unwilling to insure the
purchaser’s title without a court order
validating the purchaser’s title.
7 For example, Washington, D.C.’s statute
appears to apply only to condominium
HOAs.
8 See Nev. Rev. Stat. §§ 107.090 and
116.31168.
9 Nev. Rev Stat § 116.31168.
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CALIFORNIA MORTGAGE FINANCE NEWS 35
draws on an existing HELOC for
at least 30 days and (2) clarify to
the HELOC holder that if a payoff
demand statement is honored by
full payment, the tender is to be
considered a cancellation of the
HELOC and not merely a pay-down
of the balance. This is accomplished
by way of a statutorily prescribed
written “Borrower’s Instruction.”1
Upon a full-balance payment in
this context, AB 1770 reaffirms the
HELOC holder’s obligation to cause
the deed of trust to be reconveyed
pursuant to Civ. C. § 2941(b)(1).
The bill implicitly anticipates
the Borrower’s Instruction will be
provided to the HELOC creditor
concurrently or shorty after a Request
for Payoff Demand Statement is made
under Civil Code section 2943. To this
end, AB 1770 requires HELOC-related
payoff demand statements to state at
least one of three designated delivery
methods2 for a Borrower’s Instruction.
The Borrower’s Instruction
must be signed by the borrower, but
it can be provided to the HELOC
creditor from certain “entitled
persons,” including escrow agents.
If it is received from an entitled
person, the creditor has the right to
“conclusively rely” on it as coming
from the borrower.
AB 1770 provides a form
Borrower’s Instructions which may
be used. The form is not mandatory;
writings substantially similar are
equally effective.
The bill covers any “revolving line
of credit used for consumer purposes,
which is secured by a mortgage or
deed of trust encumbering residential
real property consisting of one to four
dwelling units, at least one of which is
occupied by the borrower.”
The California Land Title
Association sponsored AB 1770.
According to Craig C. Page, CLTA’s
Executive Vice President and Counsel,
the bill was unopposed and passed
unanimously out of all policy
committees and both houses. Adds
Page, “The bill was one of these rare
non-partisan bills which equally helps
everyone involved in residential land
transactions. It clarifies borrower
intentions in HELOC payoffs and
increases lien release certainty.
Lenders, title insurance carriers,
escrow agents, buyers and borrowers
will all be benefited.”
Civil Code section 2943.1
becomes effective July 1, 2015 and
sunsets on July 1, 2019.
The chaptered and enrolled
version of AB 1770 can be reviewed
at http://www.leginfo.ca.gov/pub/13-
14/bill/asm/ab_1751-1800/ab_1770_
bill_20140815_chaptered.htm.
•
1 The bill defines the name of the instruction
as “Borrower’s Instruction to Suspend and
Close Equity Line of Credit” but such is
a bit misleading; a better characterizing
label might be “Borrower’s Instruction to
Suspend and Conditional Instruction to
Close Equity Line of Credit.”
2 The creditor must provide an email
address, a facsimile telephone number or a
mailing address. (Civ. C. § 2943.1(b))
NEW CA STATUTE CONTINUES FROM PAGE 17
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FALL 201436
who may be financially impacted by
the value of the foreclosed property.
As the appellate court stated: “A lender
who intends to later claim that the
value of the property was impaired
due to waste, fraud, or insured
damage, but nonetheless makes a full
credit bid, interferes with that [public
value setting] process by impeding bids
from third parties willing to pay some
amount between the value the lender
places on the property and the amount
of its full credit bid.” The appeals court
noted that a lienholder could readily
preserve its right to insurance proceeds
by bidding less than the total of all of
secured amounts.
Lenders must understand when
credit bidding that, although they
are not paying cash, they are taking
part in a market to establish property
value, and full credit bids are seen by
the courts as potentially impeding that
market. In this case, the appeals court
stated that “the effect of appellants’
[Najah’s] bidding the full amount of
their second lien, notwithstanding their
belief that the property was worth less
than the combined amount of their first
and second liens, was to block other
interested parties from participating in
setting the price for the property, and
preventing the property from going
to the party that placed the highest
actual value on it.” The appellate court
summarized its approach saying “a
lender who makes a full credit bid
despite believing the value of the
property to be impaired subverts the
integrity of the foreclosure auction
at the expense of the insurer or any
other party whom the lender intends
to pursue through legal action post-
foreclosure.” In the court’s view, having
deprived Scottsdale of the benefit of
a true public auction, Najah should
not be entitled to pursue insurance
proceeds in an amount between
what Najah freely paid to obtain the
property and the amount Najah now
claims the property to be worth.
Giving effect to the full credit
bid made by the lender, the appellate
court concluded that the value of the
property established by Najah’s credit
bid was $4,627,000 (the $2,878,000
bid by Najah at the trustee’s sale and
the $1,749,000 paid by Najah to buy
the senior lien). Consequently, as the
value of the property obtained by
Najah at the trustee’s sale was equal
to the sum of all amounts owed to
Najah, the court determined that the
indebtedness owed to Najah had been
fully satisfied and that Najah had
no claim to any potential insurance
proceeds because such proceeds
would be a double recovery for Najah.
No doubt Najah was surprised and
dismayed with the outcome of this
case. At the time of the trustee’s sale,
Najah believed the property to be worth
far less than the combined amount of
both loans due, at least in part, to the
property damage caused by Orange
Crest. Had Najah thought through
his foreclosure bid strategy, he could
easily have credit bid a much lower
amount to leave outstanding sufficient
indebtedness to allow for recovery
under the Scottsdale insurance policy.
Although the facts in Najah v.
Scottsdale are relatively uncommon,
the application of the full credit bid
rule has very broad implications for
lenders in planning their foreclosure
bid strategies. The full credit bid
rule has also been applied to prevent
foreclosing lenders from later pursuing
claims for foreclosure of additional
collateral, bad faith waste, rents held
by a receiver, fraud, mortgage bond
proceeds and negligence.
A full credit bid can also be risky
to the lender should the computation
of the full credit bid amount be
erroneously high for any reason.
This can easily occur where there
is uncertainty in the calculation of
variable and/or default rate interest
due, imposition of late charges,
recovery of attorneys fees and other
enforcement costs, reimbursement
of protective advances, etc. In the
event that the credit bid made by the
lender is subsequently determined
to have exceeded the full amount of
the indebtedness, the lender runs the
risk of being required to come out
of pocket to pay the excess to junior
lienholders or even to the borrower.
Due to the potential loss of
additional recovery rights and
exposure for payment of overbid
amounts, lenders should very carefully
plan the amount of their bid(s) at
trustee’s sales. Even in circumstances
where the value of the security
property is thought to equal or exceed
the unpaid obligations, it is generally
advisable to avoid a full credit bid to
preserve potential claims against other
security, to allow for recovery under
insurance policies or against third
parties and to avoid exposure from
an inadvertent overbid. Once again
our mothers had it right, an ounce of
prevention is worth a pound of cure.
•
FULL CREDIT BID CONTINUES FROM PAGE 18
CALIFORNIA MORTGAGE FINANCE NEWS 37
by the CDFI Fund, a program of the
U. S. Department of the Treasury
(often referred to as an “Allocatee”),
individual and corporate investors can
receive a New Markets Tax Credit
worth more than 30 percent of the
amount invested over the life of the
credit, in present value terms.
The CDEs, through subsidiaries
(“Sub-CDEs”), make loans and
equity investments in qualifying
businesses. A qualifying business
must meet certain requirements,
including location in specified low and
moderate income communities (as
determined by census information)
and must create jobs for neighborhood
residents (among other requirements,
at least 50 percent of the business’s
income must be derived from activity
in the community; a substantial
proportion of the business’s property
must be located in the community;
the employees of the business must
perform a substantial proportion of
their work in the community; and less
than 5 percent of the business’s assets
can be held in unrelated investments).
There are also restrictions prohibiting
certain business activities, including
golf courses; country clubs; massage
parlors; hot tub facilities, suntan
facilities; gambling facilities; or liquor
stores. To assure compliance, the loan
documents include various on-going
reporting requirements.
How to Get Involved in New
Markets Tax Credit Transaction
Typically, the Borrower will apply
for financing either directly to the CDE
Allocatee or to a lender, or its affiliate,
FINANCING OPPORTUNITIES CONTINUES FROM PAGE 19
CONTINUED ON PAGE 38
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FALL 201438
will refinance the project and repay the
loans made by the Sub-CDE, at least
to the extent of the then-outstanding
leverage loan amounts; the Sub-CDE
will dissolve; the investment fund will
use the proceeds of the dissolution in
part to repay the leverage lender; and
the tax credit investor will exercise a
“put” to sell its equity investment in
the investment fund to an affiliate of
the project LLC for a nominal sum.
This equity investment will have
a value equal to the excess of the
amounts owed by the project LLC
to the Sub-CDE at the time of the
project refinance over the amounts
then due from the investment fund to
the leverage lenders, less transaction
costs. By contributing this value back
to the project LLC, the affiliate can
substantially lower the project LLC’s
overall ultimate borrowing costs.
Summary
NMTC transactions are complex
and require sophisticated parties and
counsel to implement, but they can
provide significant financing and cost
savings to real estate project developers.
•
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FINANCING OPPORTUNITIES CONTINUES FROM PAGE 37
at least seven years (the “compliance
period”), and the Sub-CDE must use
most of the proceeds of the QEI to
make loans to or equity investments
in qualifying businesses. In a typical
NMTC transaction involving real
estate, the parties will form a special
purpose entity to act as the Sub-CDE.
The Sub-CDE will make acquisition
and/or construction loans to a special
purpose limited liability company (the
“project LLC”) formed for the purpose
of developing a commercial real estate
project in a low income area. The
project LLC may also obtain additional
funds from an equity investor and
from conventional mortgage loans.
The security for loans made
by the Sub-CDE is often the real
property owned by the project LLC.
Accordingly, notwithstanding the
complex structure of the investment
fund and the project LLC, the loan
documents securing the NMTC loan
include documentation familiar to
California mortgage bankers: notes,
loan agreements and deeds of trust.
Repayment to the Tax Credit
Investor and Leverage Lender
During the compliance period,
the project LLC pays interest on the
loans made by the Sub-CDE, and
the Sub-CDE makes corresponding
equity distributions to the investment
fund. The investment fund uses these
distributions to pay interest to the
leverage lender, to pay transactions
costs, and to fund any return on
investment demanded by the tax credit
investor in excess of the tax credits.
The parties expect that, at the end of
the compliance period, the project LLC
which has a working relationship with
a CDE, which lender will participate
as a “leverage lender” in the financing.
These leverage lenders are often a
bank, insurance company, a non-profit
entity, a governmental entity, or an
affiliate thereof.
Structure of New Market Tax Credit
Investment
Typically, an investor seeking to
claim the New Markets Tax Credit
(a “tax credit investor”) makes a cash
equity investment in a special-purpose
limited liability company called an
“investment fund.” The investment
fund borrows additional funds from
the leverage lender. The investment
fund then make an equity investment
(a “qualifying equity investment” or
“QEI”) in the Sub-CDE. If all goes
as planned, the tax credit investor
will be able to claim a 5 percent tax
credit on the total amount invested
in the Sub-CDE, including the tax
credit investment and the leverage
loan, for each of the first 3 following
years, and a 6 percent tax credit for
each of the next 4 following years.
For example, if the tax credit investor
invests $5 million in the investment
fund, the investment fund borrows
$15.5 million, and the investment fund
makes a $20 million qualifying equity
investment in a Sub-CDE, the tax
credit investor may claim tax credits of
$1 million per year for the next three
years and $1.2 million a year for the
next four years after that.
In order for the tax credit
investor to claim the tax credits, the
investment fund must maintain its
equity investment in the Sub-CDE for
CALIFORNIA MORTGAGE FINANCE NEWS 39
California Mortgage Bankers Association • 2014 - Media Planner / page 1 of 5
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2014 Media PlannerCALIFORNIA MORTGAGE BANKERS ASSOCIATION
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n CMBA Legislative & Buyer’s Guide This annual publication features a NEW Buyers’ Guide section where members can include their logo (with their descriptions) and display ads. Publication is distributed to:
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California mortgage finanCe news 1
CALIFORNIA MORTGAGE BANKERS ASSOCIATION
THE VOICE OF REAL ESTATE FINANCE
Fa L L2 0 1 1
in this issue...Chairman’s Corner page 1
exeCutive DireCtor’s Letter page 4
LegisLative report page 5
resiDentiaL news page 6
CommerCiaL news page 8
rounDtabLe artiCLe page 9
DeLinquenCy survey page 10
CaLenDar page 11
weLCome new members page 12
roaD trip page 18
photo gaLLery page 21
Contact: California Mortgage Bankers Association
(916) 446-7100 Phone
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[email protected] email
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California mortgage finance news is published four
times per year: spring, summer, fall and winter.
California mortgage finance news is published by
the California mortgage Bankers association.
editor: Dustin Hobbs
publisher/layout: wolfe Design marketing
A few weeks
ago, one of the
authors of the
Wall Street Reform
and Consumer
Protection Act of
2010 (Dodd-Frank)
wrote a determined defense of the law
in one of the leading newspapers in the
country. One of the main purposes of
the article, it seemed, was to counter
a ‘myth’ that the law has caused
uncertainty in the economy, leading
to the current sluggish growth rates.
The article highlighted the fact that
while most in the business community
(and certainly in the real estate finance
industry) see uncertainty as a major
stumbling block to growth, many policy
makers and commentators believe
that the specter of uncertainty is either
exaggerated or a ‘myth.’ Therefore, it is
important that we do our best to explain
just what we mean by ‘uncertainty,’
both in the residential and commercial/
multi-family sides of the business.
First and foremost, of course, is
the 2,000+ page Dodd-Frank law that a
former Treasury Department official has
described as a ‘tsunami of change.’ The
bill will eventually spawn thousands
of pages of rules that will take years
to promulgate and implement, and
between normal turnover at the relevant
regulators and possible changes in the
White House and Congress, how can
we even guess what the regulatory
atmosphere will look like in 12 months,
two years, and beyond? The bottom
line is that businesses are inherently
future-looking, trying to make decisions
(hire/expand or sit tight/contract?)
based on what the market will look
like. This is what some seem to have
trouble grasping – the author of the
article mentioned above attempts to
defend Dodd-Frank from the uncertainty
attack by describing how few rules
have actually been written: “…even
though only 10 percent of Dodd-Frank’s
provisions have been implemented
so far, critics claim that the law
perpetuates ‘job-killing uncertainty.’”
CHairman’s Corner
is Uncertainty Just a myth?by tom DuDLey, Cmba Chairman, newmark reaLty CapitaL, inC.
ContinUeD on Page 3
CALIFORNIA MORTGAGE BANKERS ASSOCIATION
THE VOICE OF REAL ESTATE FINANCE 2014
Buyer’s Guide
California Mortgage Finance
CMBA Legislative &Buyer’s Guide
&
CALIFORNIA MORTGAGE FINANCE NEWS 41
2014 theMes And deAdlines
space reservation: February 12, 2014Artwork deadline: February 28, 2014Published: March 19, 2013
*Winter 2014Theme: Residential Originationspace reservation: January 29, 2014Artwork deadline: February 8, 2014Published: February 18 2014
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*summer 2014Theme: Commercial / Multifamilyspace reservation: July 28, 2014Artwork deadline: August 8, 2014Published: August 18, 2014
*Fall 2014Theme: Legislative/Regulatory/Compliancespace reservation: October 24, 2014Artwork deadline: november 7, 2014Published: November 17, 2014
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Full page $690 525 ½ page $415 310 1/3 page $305 230
*4X rate is the same as getting one ad FREE - 25% discount.
CoLor ChArGES – Add to the applicable rates above for each insertion: $100 for full pg., $75 for 1/2 pg., and $50 for 1/3 pg.
CoVErS / PREMIUM POSITIONSCoVErs: Cover position are 15% more than the standard rate. Please contact us for availability.
Ad size (1X) (6X) (12x)Banner $500 350 245 Includes a link to your website.
nOte: All rates are CMBA Member-only rates. non-members, add 15%.
For advertising questions / reservations: (530) 642-0111 / [email protected]
Ad rAtes - Prices reflect per issue rate
CALiForniA MortgAgE FinAnCE nEws
pAyMents
The California Mortgage Bankers Association will email an invoice upon ad confirmation. Payment can be made by check or credit card: MasterCard, VISA or American Express. For insertions in more than one issue, you can pay per issue or for the full contract. All payments will be payable to CMBA. A copy of the issue will be sent to the advertiser’s address(es) provided.
Approval: Acceptance of advertising is subject to approval by publisher. E-NEwS (Electronic Bulletin)
Please submit contracts, insertion orders, confirmations and artwork to:
Diana GrangerPublishers advertising [email protected](530) 642-0111 • (530) 622-6033 FAX1347 Martin Lane, Placerville, CA 95667
VALUE-ADDED ADVERtiSER BONUSES!
CALiForniA MortgAgE FinAnCE nEws insErtion BonUs: When you advertise in four issues of California Mortgage Finance News publication you save with a 25% discount per issue (see rates on the right). This translates into a FREE ad! Plus, when you advertise in four issues you receive a FREE banner ad in E-News.
SAViNGS SuMMAry:Advertise in four issues and receive a 25% discount (same as one FREE ad) and receive a FrEE banner ad for one month in E-News. - a $500+ value for FREE!
SUBmiSSiON mEthODS
Contact: [email protected] / 530-642-0111 • CMBA 2014 Media Planner / page 4 of 5
California Mortgage Bankers Association 2014 Media Planner
you decide the impact you want to make!
CALIFORNIA MORTGAGE FINANCE NEWS 43
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AUGUST 28, 2014, OFFICES OF SMITH DOLLAR PC, SANTA ROSA, CA
CMBA Regional Networking Series Present: Santa Rosa After Hours
A very busy few months started with one of our free networking events in
Northern California, at the offices of Smith Dollar PC on August 28th.
The event was a great way to bring Bay Area real estate pros together for
casual conversation and refreshments.
Meeting new friends and stirring up old friendships is what the events are
all about!
Thanks very much to Rachel Dollar and Glen Smith for their hospitality
and support!
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SEPTEMBER 3, 2014, OFFICES OF ALLEN MATKINS, LOS ANGELES, CA
CMBA Regional Networking Series Present: Los Angeles After Hours
As a way to kick off our annual Western States CREF Conference later
that month, Gold Sponsors Allen Makins hosted back-to-back networking
events, starting in their Los Angeles offices on September 3rd.Friends old and new.
Reps from Northmarq, GE Capital and ODIC Environmental and Energy
enjoyed good company and a good time thanks to our hosts!
NXT Capital and Greystone were also well-represented at the event.
CALIFORNIA MORTGAGE FINANCE NEWS 45
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SEPTEMBER 3, 2014, OFFICES OF ALLEN MATKINS, SAN FRANCISCO, CA
CMBA Regional Networking Series Present: San Francisco After Hours
Just one week later, in San Francisco, Allen Matkins graciously hosted
another free networking event!
The networking events brought together friends and colleagues from across
the San Francisco Bay Area.
2013-2014 CMBA Chairman Dennis Sidbury of Northmarq Capital with Fabio Baum of Opus Bank.
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SEPTEMBER 17-19, 2014, LAS VEGAS, NV
17th Annual Western States CREF Conference
This year’s annual Western States CREF Conference kicked off with a great economic panel highlighted by presentations from Heitman’s Mary Ludgin
and Esmael Adibi of Chapman University. Photo from left: Kevin Randles, CMBA Commercial/Multi-Family President, CBRE; Ludgin; Adibi; Jeff
Burns, Conference Chairman, Walker & Dunlop.
The conference is not possible without the support of our great sponsors,
including David Rosenthal and Curtis-Rosenthal, Inc., which has
sponsored the event since the very first one, 17 years ago! From left:
Rosenthal; Sherry Lake.
Our top sponsor this year was Umpqua Bank – thanks so much for your
support!
CALIFORNIA MORTGAGE FINANCE NEWS 47
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SEPTEMBER 17-19, 2014, LAS VEGAS, NV
17th Annual Western States CREF Conference (continued)
One of the more highly-anticipated panels this year was focused on
permanent loan finance, featuring top experts such as (from left): Jeffrey
Salladin, Hudson Advisors, LLC; Kieran Quinn, Guggenheim Partners;
Jaime Zadra, Prudential Mortgage Capital Company; Roddy O’Neal,
Goldman Sachs Commercial Mortgage Capital, LP; David Moehring,
Union Bank.
Another one of our great sponsors, JCR Capital and Jay Rollins (left).
The conference concluded with a panel on multihousing lending, featuring
(from left): Rob Noble, Umpqua Bank; Rick Wolf, Greystone; Phyllis Klein,
Fannie Mae; Rich Martinez, Freddie Mac; Kirk Kniss, New York Life.
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OCTOBER 2, 2014, OFFICES OF SPIEGEL ACCOUNTANCY CORP., WALNUT CREEK, CA
CMBA Regional Networking Series Presents: Walnut Creek After Hours
Our next free networking event was at the offices of Spiegel Accountancy
Corp in Walnut Creek!
Thanks to Jeff Spiegel (left) and his team for their hospitality and support!
The event is the second networking event Spiegel has held for us in the
past two years, and it was a big success again!Industry pros enjoyed some refreshments and great conversation.
CALIFORNIA MORTGAGE FINANCE NEWS 49
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OCTOBER 9, 2014, CENTER CLUB, COSTA MESA, CA
CMBA Regional Networking Series Presents: Costa Mesa After Hours
Our next free networking event was on October 9th in Costa Mesa at the fabulous Center Club! The event brought together residential and commercial
real estate finance pros from across Orange County!
Big thanks to our hosts and sponsors Essent Guaranty and Geraci Law
Firm for their generosity!
Make sure to stay tuned to www.CMBA.com to find out about our next
FREE networking event!
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OCTOBER 14, 2014, OFFICES OF BUCKLEYSANDLER, LLP, SANTA MONICA, CA
CMBA Regional Networking Series Presents: Santa Monica After Hours
Down south, in Santa Monica, our next free networking event was hosted
by law firm BuckleySandler.
An enjoyable time was had by all, connecting friends and colleagues!
CMBA Directors Scott Whittle, Incal Associates, Ltd (left) and Art Shafer
of Comerica Bank (right).Thanks again to Clint Rockwell (center) and the BuckleySandler team for
hosting a great event!
CALIFORNIA MORTGAGE FINANCE NEWS 51
Building Stronger Partnerships
The CMBA Road Trip continued with a stop at the Los Angeles offices of
Bolour Associates. A privately-owned real estate investment, development
and finance company, Bolour Associates has been a CMBA member for
a number of years and has been a big supporter of our annual Western
States CREF Conference. Big thanks to Elliot Shirwo and team Bolour for
their time and participation with CMBA! For more information, call (323)
677-0550 or go to www.bolourassociates.com.
Next, Susan visited the offices of Koss REsource, meeting with Samson
Lov and his team. Koss REsource is a commercial real estate website for
financing, networking, listing, and information, and CMBA has enjoyed
partnering with the company to provide our members with discounted rates
with Koss, and the company has also participated as a sponsor of the
Western States CREF Conference for the past few years. To find out more,
go to www.KossREsource.com.
CALIFORNIA MORTGAGE BANKERS ASSOCIATION555 Capitol Mall, Suite 440Sacramento, CA 95814
Epstein Turner WeissA ProfEssionAl CorPorATion
California Law Firm Serving the Mortgage Lending Community
CMBA member David Epstein is the partner heading the firm’s practice in:
• Lien priority and title resolution• Insurance and title insurance coverage• Mortgage repurchase and warehouse lending• Loan fraud• Real estate litigation• HBOR, QWR, and GLB issues• Business and commercial law
Epstein Turner Weiss is a Los Angeles-based law firm concentrating in mortgage, real estate, title insurance, business and employment defense.
We are experienced counsel in mortgage, title and real property litigation in state and federal court at the trial and appellate levels.
Contact David Epstein [email protected]
We are proud to be aCMBA member.
PARTnERs
David B. EpsteinJonathan M. TurnerMichael R. Weiss
633 West Fifth street
Suite 3330
Los Angeles, CA 90071
Phone: 213-861-7487
Fax: 213-861-7488
www.epsteinturnerweiss.com