The political environment this past year was such that every politician wanted to take credit for solving the mortgage/foreclosure crisis. Many tried; most failed. SB 1137, signed by the Governor on July 8, 2008, is urgency legislation which became effective immediately. However, sections 2 and 4 (the notice provisions) were delayed and become effective on Saturday, September 6, 2008. The good news is that the provisions of SB 1137 sunset on January 1, 2013 unless extended by the legislature prior to that time.

While SB 1137 is full of ambiguities, lacks definitions and may be unconstitutionally uncertain, most beneficiaries, loan servicers and trustees should be able to substantially comply with the spirit of the law if not the letter of the law. As bad as SB 1137 is, it would have been totally unmanageable had it passed without industry input.

Beneficiaries and loan servicers should consult with their compliance attorney to determine how to structure compliance with the provisions of section 2923.5. While legislation is often metaphorically viewed as making "sausage", SB 1137 is an insult to sausage. Nonetheless, full compliance will be necessary by 9-6-08.

or, (2) 30-days after satisfying the due diligence requirements of section 2923.5(g); or (3) after qualifying for one of the exclusions under section 2923.5(h).

During the initial contact, the beneficiary or authorized agent must advise the borrower that he or she has the right to request a subsequent meeting and, if requested, the beneficiary or authorized agent shall schedule the meeting to occur within 14 days. (Civ. Code § 2923.5(a).) A beneficiary's or authorized agent's loss mitigation personnel may participate by telephone during any contact required by this section. (Civ. Code § 2923.5(d)(2).)

Whether the assessment of the borrower's financial situation and discussion of options occurs at the initial meeting or at a subsequent meeting within 14 days, the borrower shall be provided the toll-free telephone number made available by the United States Department of Housing and Urban Development (HUD) to find a HUD-certified housing counseling agency. Any meeting may occur telephonically and does not have to be in person.

Where the loan servicer undertakes SB 1137, except where a loan servicing agreement is broad enough to specifically authorize the loan servicer to fulfill the requirement of Civil Code § 2923.5 for his principal (beneficiary), the loan servicer (e.g., broker) should consider modifying its loan servicing agreement to specifically authorize the broker/loan servicer to undertake the requirements of

It is unclear what type of proof is necessary to satisfy the lender that a person allegedly "designated" by the borrower can speak for the borrower. While not addressed in SB 1137, if an authorized agent (including an attorney) wants to discuss the borrower’s personal financial information (not just options to avoid foreclosure) possessed by the lender or servicer, the lender or servicer should consider obtaining a written authorization to release (discuss) such information with the agent. Otherwise, the lender or loan servicer risks disclosing the borrower’s confidential financial information to a third party who may not prove to be the borrower’s authorized agent. Consideration should be given to providing an authorization form (prepared and approved by counsel). The lender’s counsel approved form of authorization may be provided on the lenders or on the loan servicer’s website or may be delivered in any other fashion (e.g., mailed, faxed, e-mailed or personally delivered) to the borrower or to the borrower’s designated authorized agent. Keep in mind simply to discuss options to avoid foreclosure with the borrower’s "designated agent" probably does not require much proof because these options are usually going to be generic. It is only if these discussions with the borrower’s agent go into the borrower’s personal financial information that a more detailed written authorization might be necessary. The lender’s or loan servicer’s authorization form should not be the sole form accepted as long as the form provides appropriate authorization for the lender or servicer to discuss and disclose the borrower’s personal financial information with the designated agent (i.e., where such conversations are going to take place).

(3) A beneficiary or authorized agent satisfies the telephone contact requirements of § 2923.5(g) if it determines, after attempting contact pursuant to § 2923.5(g), that the borrower's primary telephone number and secondary telephone number or numbers on file, if any, have been disconnected.

(4) If the borrower does not respond within two weeks after the above telephone call requirements have been satisfied (e.g., calls or determination that the borrower telephone numbers have been disconnected), the beneficiary or authorized agent shall then send a certified letter, with return receipt requested. ("Due Diligence Letter").

(6) The beneficiary or authorized agent has posted a prominent link on the homepage of its Internet Web site, if any, to the following information: (a) Options that may be available to borrowers who are unable to afford their mortgage payments and who wish to avoid foreclosure, and instructions to borrowers advising them on steps to take to explore those options; (b) A list of financial documents borrowers should collect and be prepared to present to the beneficiary or authorized agent when discussing options for avoiding foreclosure. (This is where the beneficiary or loan servicer may want to put the agent authorization form and list it as a document to bring to the meeting); (c) A toll-free telephone number for borrowers who wish to discuss options for avoiding foreclosure with their mortgagee, beneficiary, or authorized agent; and, (d) The toll-free telephone number made available by HUD to find a HUD-certified housing counseling agency. Civil Code § 2924.5 does not specify in any further detail how or what should be included in the lender or servicer’s website.

While not addressed in SB 1137, where the loan servicer or trustee is subject to the Federal Fair Debt Collection Practices Act ("FDCPA"), it should be careful to

comply with all of the requirements of the FDCPA (e.g., the mini-Miranda warning in 15 U.S.C. § 1692e(11); validation notice under 15 U.S.C. §1692g, etc.) The FDCPA prohibits communication with the consumer in connection with the collection of a debt at any unusual time or place or in a manner or place known (or which should be known) to be inconvenient to the consumer. ("Safe Harbor" hours are between 8:00 a.m. and 9:00 p.m. if not known to be inconvenient to the borrower). Whether you are subject to the FDCPA and how to comply should be discussed with your compliance attorney.

What happens if a lender, trustee or servicer relies on the bankruptcy exclusion and the bankruptcy is dismissed before the sale occurs? Probably nothing if the bankruptcy was filed and not finalized at the time the NOD (or NOS in the transition period) was filed. The trustee, lender or authorized agent should not

engage in the contact requirements of SB 1137 while the borrower is in bankruptcy, as this may violate the automatic stay in bankruptcy.

A NOD filed on or after September 6, 2008, shall include: "[A] declaration from the mortgagee, beneficiary, or authorized agent that it has contacted the borrower, tried with due diligence to contact the borrower as required by this section, or the borrower has surrendered the property to the mortgagee, trustee, beneficiary, or authorized agent." (Civ. Code § 2923.5(b).)

The form of the declaration is not specified in Civil Code § 2923.5(b) The form of the declaration should be provided by compliance counsel and is likely to vary depending on whether compliance is achieved by contact or due diligence or by application of one of the exclusions. Some counsel may even argue that a declaration is not needed for exclusions because no such exclusion is mentioned in Civil Code § 2923.5(b). The more conservative approach, however, would be to draft and use declarations when any exclusion in Civil Code § 2923.5(h) is relied upon.

While not expressly addressed in SB 1137, it is unlikely that the "declaration" must be "sworn" or "under penalty of perjury". A good argument can be made that when the legislature intends for a "declaration" to be under penalty of perjury, it states so in the statute. For example, Civil Code § 2941.7 (i.e., where a beneficiary cannot be found or where the beneficiary refuses to reconvey after payoff), specifically states that: "The declaration provided for in this section [2924.7] shall be signed by the mortgagor or trustor under penalty of perjury."

The use of the words "prior to enactment of this section [§2923.5] is problematic as the statute was technically enacted on July 8, 2008 when the chaptered bill was enrolled with the Secretary of State after being signed by the Governor. However, Section 10(b) of SB 1137 provides that the provisions of sections 2 and 4 of the Act (i.e., Civil Code §§ 2923.5 and 2924.8) shall become operative "60 days after the "effective date" of SB 1137. The "effective date" was July 8, 2008 and 60 days thereafter should be Saturday, September 6, 2008. The problem that may occur is that Section 10 of SB 1137 is found in what are called the "uncodified sections", meaning that that section will not appear in the printed code sections relied upon by attorneys. To respond to challenges by consumers,

their representatives and counsel prior to September 6, 2008, beneficiaries, loan servicers, trustees and their respective counsel should keep on hand a chaptered copy of SB 1137 with section 10(b) highlighted for the purpose of promptly responding to claims. However, the most likely statutory interpretation of SB 1137 is that the transition period for loans covered by Civil Code § 2923.5 commences on 9-6-08 where a NOD was recorded prior to 9-6-08 and a NOS will be recorded on or after 9-6-08. It would make no sense for the transition period to predate the time when Civil Code §§ 2923.5 and 2924.8 become effective. Furthermore this interpretation appears more consistent with the legislative intent and is most protective of the consumer.

Clearly, as to loans covered by Civil Code § 2923.5, beneficiaries/servicers who have not implemented SB 1137 compliance by the time this article is read, will be delayed for whatever time it takes to achieve compliance as they cannot record a NOD (or a transitional period NOS) until they have complied with section 2923.5.

Notices of Sale to Resident of Foreclosure of Residential Rental Properties: (Foreign Language Copies). SB 1137 added Civil Code § 2924.8 which only apply: (1) To loans secured by residential real property; and, (2) If the billing address for the mortgage note is different than the property address.

Section 2924.8 is not limited to "owner-occupied" residential properties nor is it limited to loans made between 1-1-03 and 12-31-07. Section 2924.8 does not define what "address for the mortgage note" means. However, it can be assumed that where the servicer originally, or after the loan is made, has an address for the borrower that is different than the address of the property for the purpose of sending notices under the note, § 2924.8 should be applied.

an envelope addressed to the "Resident of property subject to foreclosure sale" the following notice in English and the languages described in Civil Code § 1632 (i.e., Spanish, Chinese, Tagalog, Vietnamese, and Korean).

The Notice of Sale to Resident shall read:

(Civ. Code § 2924.8(a).) The form including foreign language translations were done by the State of California and are posted on the California Department of Corporations website at http://www.corp.ca.gov/FSD/pdf/Notice_of_Sale.pdf.

It is an infraction to tear down the new notice within 72 hours of posting. Violators shall be subject to a fine of one hundred dollars ($100). (Civil Code § 2924.8(b).)

Should the § 2924.8 notice to resident be posted and mailed to the property address on all types of property (i.e., residential, commercial, industrial or vacant land) just to be cautious? No. But the notice probably should be posted and mailed on all residential properties (e.g., single family, multi-unit or mixed use where part of the property is residential) where the billing address for the mortgage note is different than the property address. Since Civil Code § 2924.8 does not specifically refer to "rental property", the new notice may create some confusion if posted on purely non-residential property. The problem is that the new State approved Notice of Sale to Resident references "rental property" and does not limit that statement to residential rental property. The required language goes on to refer to the "60-day eviction notice" which, in a different code section, expressly only applies to "residential properties. (See, new Code of Civil Procedure § 1161b). Because of these ambiguities between Section 2924.8, the new notice contained in that section and the provisions of new Code of Civil Procedure § 1161b, if the new Notice of Sale to Resident is given to tenants of non-residential properties, it has the risk of confusing nonresidential tenants. Since Civil Code § 2924.8 is designed to protect residential rental tenants, it is best to err on the side of giving the notice whenever the trustee, beneficiary or their agents are not sure.

Should the notice to resident be mailed to the trustor (borrower) or other persons (besides the occupant of the residential rental property) who are entitled to

receive NODs or NOSs? No. The new Notice of Sale to Resident should only be mailed to "Resident of property subject to foreclosure sale". Civil Code § 2924.8(d) states: "This section shall only apply to loans secured by residential real property, and if the billing address for the mortgage note is different than the property address." Since is unclear what is meant by "billing address for the mortgage note, we recommend mailing and posting the "notice to resident" in any case where the beneficiary originally, or subsequently, had in its file an address for the purpose of notifying the borrower (e.g., for sending statements) other than that of the secured property. For example, whenever the lender’s file reveals that a street address, rural postal route, P.O. Box, private mailing center (e.g., box) etc. has been used by the borrower, other than the address of the secured property", the best practice would be to post and mail the new Notice to Resident.

Could such an approach create confusion to the trustor if he/she is occupying the property even though he/she is using an address other than the secured property?

Probably not. The statutory wording expressly states: "If you are renting this property, the new property owner may either give you a new lease or rental agreement or provide you with a 60-day eviction notice. New Code of Civil Procedure § 1161b(b) expressly states: "This section shall not apply if any party to the note remains in the property as a tenant, subtenant, or occupant." KEEP IN MIND THE PROVISIONS OF CODE OF CIVIL PROCEDURE § 1161b BECAME EFFECTIVE ON JULY 8, 2008 AND IS NOT SUBJECT TO THE 60-DAY DELAY THAT APPLIES TO THE CONTACT AND NOTICE TO RESIDENT PROVISIONS OF CIVIL CODE SECTIONS 2923.5 AND 2924.8.

Unlike many local ordinances requiring the lender or trustee to inspect the property prior to recording an NOD, SB 1137, only applies where the "legal owner", whether it is the lender or a third party purchaser, acquired title through a foreclosure sale. Therefore, the provisions of Civil Code § 2929.3 are likely to most important to the lender’s REO departments or agents.

• A governmental entity may impose a civil fine of up to one thousand dollars ($1,000) per day for a violation.

• To impose a fine, the government entity must give notice of the alleged violation, including a description of the conditions that gave rise to the allegation, and notice of the entity's intent to assess a civil fine if action to correct the violation is not commenced within a period of not less than 14 days and completed within a period of not less than 30 days.

• The notice must be mailed to the address provided in the deed or other instrument as specified in Government Code § 27321.5 (a), or, if none, to the return address provided on the deed or other instrument.

• The governmental entity shall provide a period of not less than 30 days for the legal owner to remedy the violation prior to imposing a civil fine and shall allow for a hearing and opportunity to contest any fine imposed.

• In determining the amount of the fine, the governmental entity shall take into consideration any timely and good faith efforts by the legal owner to remedy the violation.

• The maximum civil fine authorized by this section is one thousand dollars ($1,000) for each day that the owner fails to maintain the property, commencing on the day following the expiration of the period to remedy the violation established by the governmental entity.

• Subject to the provisions of § 2929.3, a governmental entity may establish different compliance periods for different conditions on the same property in the notice of alleged violation mailed to the legal owner.

• For purposes of § 2929.3, "failure to maintain" means failure to care for the exterior of the property, including, but not limited to, permitting excessive foliage growth that diminishes the value of surrounding properties, failing to take action to prevent trespassers or squatters from remaining on the property, or failing to take action to prevent mosquito larvae from growing in standing water or other conditions that create a public nuisance."

• Notwithstanding the above, a governmental entity may provide less than 30 days' notice to remedy a condition before imposing a civil fine if the entity determines that a specific condition of the property threatens public health or safety and provided that notice of that determination and time for compliance is given. Fines and penalties collected pursuant to this section shall be directed to local nuisance abatement programs.

• A governmental entity may not impose fines on a legal owner under both Civil Code § 2929.3 and a local ordinance. However, the rights and remedies provided in § 2929.3 are cumulative and in addition to any other rights and remedies provided by law. Unfortunately, section 2929.3 does not preempt any local ordinance many of which are vague at best and probably unconstitutionally uncertain.

While complex, devoid of necessary definitions and subject to extensive ambiguities, beneficiaries, trustees and their authorized agents must comply and should adopt policies and procedures to attempt compliance no later than September 6, 2008. Hopefully, next year, the legislature will clean up many of the obvious problems in SB 1137. It is unlikely that any legislative relief will become effective until January 1, 2010. Policies and procedures will have to be refined over time to get all of the bugs out. Most beneficiaries and trustees would be well advised to consult counsel regarding implementing SB 1137 into their day-to-day policies and procedures. Compliance packages have been prepared by a number of compliance attorneys that should be able to help guide beneficiaries, servicers and trustees through the SB 1137 compliance maze.