AB 130: A Critical Briefing for California Lenders

Melissa C. Martorella, Esq.:

Welcome everybody. Thank you for joining us this morning or afternoon if you're not in California, to join us on this webinar today. Today we will be talking about AB 130, a Critical Briefing for California Lenders. First, a few housekeeping items. First off, there is a chat feature on here. If you have any questions, please don't put it in the chat. If you click over, there should be another tab there. It'll say more, or you should just have a q and a. If you have any questions throughout the webinar, please feel free to put your questions in the q and a. Ricky and I will go through that at the end and answer all of your questions to the best of our ability. So no questions in the chat. Put them in the q and a second. Yes, this webinar is being recorded, and yes, we will provide the slides to you afterwards.

Hopefully that'll go out today, but sometimes the Zoom recordings take a moment, so at latest you will get the recorded version to share with your friends and coworkers and other interested people tomorrow. So look out for that. Yeah, thank you all for joining here today. So to get started, like we said, we're talking about AB 130 today. I'm sure many of you know me, but just in case you don't, my name is Melissa. I'm one of the partners here at Fort. I just celebrated my 10 year work anniversary here this week, so it's been a fun ride. But what I do here on the team is I manage the banking and finance team and primarily help lenders make business purpose loans secured by real estate all across the country. But a subset of what I do is foreclosure in California, so AB 130 is very important for that. So that's why I'm here talking with you today and with me today is Ricky.

 

Ricky Shah, Esq.:

Hi there. I'm an attorney in the litigation and bankruptcy division of the firm. So been practicing for about 15 years now as a lawyer, entirely as a litigator, been mostly doing work on behalf of lenders, anyone on the basically foreclosure property, property ownership side. So I'll be discussing more of the sort of what to expect in terms of litigation practices, what do we think will happen in the future.

 

Melissa C. Martorella, Esq.:

Awesome, thank you Ricky. It's his first webinar with us, so I'm looking forward to doing this with him today. So to get started, I'll go over the agenda. So big picture things that we're going to talk about is how broadly does AB 130 apply? We'll talk about the foreclosure process and what has changed and what you need to know about. We'll talk about best practices for how to proceed depending on where you're at in a current foreclosure that might be affected by AB 130. We'll talk about some other lending considerations because of the new law, and then as Ricky mentioned, he will dive in talking about what litigation to anticipate and that borrower recourse side and what you can expect to see there. So with that, take it away, Ricky.

 

Ricky Shah, Esq.:

All right, so this is about AB 130, which if everyone remembers was the giant SQL bill. So it was like a 200 page bill, but in the middle of that there was a new edition, which was called Section 29 24 0.13. It was effective as of July 1st. It was one of these bills that just goes into immediate effect, although technically it's not retroactive, but it's actually the way it's drafted and ends up being extremely retroactive. So it covers currently in loans that are just in existence and then about the ability to foreclose on those loans based upon prior requirements and prior conduct.

 

So what is covered by AB 130? Again, AB 130 covers every subordinate lien on a residential real property. It doesn't matter if we're talking one unit, 10 unit a hundred units, it's there otherwise it doesn't matter if it's a business purpose or consumer loan. It covers everything. The one section that matters that the borrower that is using the definition under a different code section, that code section sites borrower to also include successor and interest. So basically the borrower who can sue, can also sue him for conduct behind on a predecessor. Again, this is retroactive. It applies based on the subordination at the time of recording. There's sort of an analysis. If you're in created in first subordinate later, it arguably does not apply. It should not apply. But again, this is the way litigation works and then I'll discuss later at the end sort of if you originally subordinate it, but you kind of move up to first, the law does apply. So there's got to be a strategy that has to be done with those kinds of conditions.

 

Melissa C. Martorella, Esq.:

Awesome. So to kind of recap here, this new law AB 130, it will apply to junior liens in California. So whether you're in second position or fifth position, it will apply to you and it applies on residential properties. So if you've got commercial properties, you can stop listening there, but if you're doing junior position liens on any sort of residential property, you will care about this. And as Ricky mentioned, the subordination provisions here are very interesting. So if you arguably start your loan in first position, but then later on decide to subordinate to a future lien holder, arguably the way this is written, it won't apply to you and obviously as Ricky says, we'll see if that's contested in the courts later on, but that's just an interesting tidbit for you. However, say you make a second position loan and the first pays off and now you are in first position, but as Ricky mentioned, it matters at the time of loan origination. So even though you are now in first position, this law will still apply to you and the statute doesn't talk about it being retroactive, but the nature of what the requirements are mean that this does apply to loans that were made before the effective date of AB 130. So unfortunately we have a bunch of new requirements here that were unknown to all of us until a month or so ago, and now we're trying to figure that out and navigate that with you.

 

Melissa C. Martorella, Esq.:

The big area to talk about with this, there are some other areas, but one of the main focuses here is foreclosure. We're talking about the old foreclosure process in general. You do your NOD, your notice of default and then you go to notice of sale and then you would go to sale. Didn't matter if you were in first position or a junior position, it was a pretty straightforward process in California. But as we've sort of seen starting around 20 19, 20 20 with the pandemic, California has increasingly added new requirements to foreclose and just I feel like there's hurdle after hurdle that lenders have to go through in California to foreclose on their liens and protect their interests. So as you know from prior articles and webinars that we've put out, we have SB 10 79, which affects one to four family properties in California with qualified bidders being able to come in.

 

So that's something you have to worry about. We have AB 2 4 2 4, which puts in some appraisal requirements and also some postponement requirements. Certain conditions are met, so you have that hurdle to deal with AB 30 88. Thankfully that's a little bit less applicable now to our business purpose loans, but still can be in certain situations, which requires lenders to do certain homeowner bill of rights requirements prior to starting a foreclosure. We even had hon, this court decision that went through that also limits when you can charge default interest. So lately, and it feels like in the past five, six years, California is really attacking this default position on your loans and really affecting your foreclosure process and AB 130 is just the next kind of hurdle that you have to go through. So to kind of talk about that, the big thing that everybody's asking is what does this mean? What do we have to do? There's basically a new certification requirement that has to go into play prior to foreclosing, and we'll talk about that a little bit.

 

Melissa C. Martorella, Esq.:

So basically this new certification requirement, it applies before you conduct or even threaten to conduct a non-judicial foreclosure. So you can declare the loan in default, you can accelerate your loan, you can issue reinstatement or payoff demands. You can kind of proceed as usual with that and other normal non-threatening collection activity, but you do have to think about the letters that you're sending because now you cannot threaten a foreclosure and that's frustrating. We send demand letters all the time on behalf of our clients saying, Hey, borrower, you're in default because you've missed payments, missed maturity, haven't paid taxes, X-Y-Z-F-Y-I. These are all defaults, and lender may pursue recourse under the loan documents, which may or may not include proceeding with a non-judicial foreclosures within lender's discretion. I don't consider that necessarily a threat. You are just letting the borrower know, Hey, you're in default. You need to fix this, or foreclosure could be on the horizon for you.

 

Melissa C. Martorella, Esq.:

You really can't say that anymore. In the demand letters though is how I would interpret this nonthreatening collection activity. You can't threaten a foreclosure anymore, so you really need to look at what your demand letters are saying in your collection statements, so it can't be misconstrued and seen as threatening a foreclosure. There is no restriction now on issuing payoff of reinstatement demands, collecting and applying funds, anything like that, making demands or attempting to modify, extend, or forebear on any of these loans. That seems all to be fine still. It's really that threatening of a foreclosure activity, something that we would recommend that you put in any sort of agreement going forward or in especially, for example, modification documents or forbearance documents is a waiver of any potential AB 130 claim. Whether or not that's enforceable remains to be seen, but I think that's a great thing to consider to put into your future agreements because as we will talk about in a moment, there's a lot of compliance that you should have been doing the whole time that none of us knew about until this law came into effect, and so hopefully this will help mitigate against any AB 130 claims down the line.

 

Ricky Shah, Esq.:

The next question is, okay, what do you specifically need to certify? So this is what is called unlawful practices. Again, this is the statutory term of art and even though basically on June 30th these were not unlawful as of July 1st, if you had done this, this is now considered unlawful. For example, the first one is a failure to communicate in writing with borrowers in the past three years. We know that there's a lot of loan provisions that basically say, I'm not to do it. I don't need to give any actual statements or anything like that, or any communication according to the statute that's considered now unlawful. That's just the nature of it. The other two again, are failure to provide a servicing transfer notice, failure to provide ownership transfer notices if the're required by law, the provisions that they cite are under RESPA until, so they would really don't apply to business purpose loans, but again, it's broadly worded.

 

Ricky Shah, Esq.:

Borrowers counsels will claim all sorts of things. We kind of have to just see where this goes, but for the most part, if it's a business purpose loan, the statutory provisions or don't apply because those are related to consumer purpose loans. Again, number four is if you conduct or threaten to conduct a foreclosure sale after some sort of discharge, including IRS forms about that thing. So they just want to make sure they're attacking you if you've discharged the debt and still go after them again. Number five is whether or not the applicable statute of limitations expired. That's the next issue. And then the sixth one is a failure to provide a period and account statement if required by law. Citations in there again are to the till A and then the claim investor guarantor requirements, but again, these don't seem to apply to business purpose loans. These wouldn't apply if the loan documents don't require it. The last part to be concerned about is again, this is conduct to any borrower including the predecessor and interest borrower. So we're going to have expect allegations of conduct by the servicer or prior servicer to a prior predecessor and interest that's going to be difficult to prove or disprove as it's

 

Melissa C. Martorella, Esq.:

Excellent. And just to flesh out a little bit here as well is I know a big one that we are seeing is servicing transfer notices. Arguably these don't apply to business purpose loans, but on certain ones they may apply, and I know that's been a big thing. So I know for example, in loan document sets we're considering putting in first payment letter, first payment letters that deal with servicing and that sort of thing, and then ownership transfer notices. Again, these may not actually apply to most business purpose loans, but in the event they interpreted to apply to a business purpose loan, we would recommend doing a sort of hello goodbye letter if you're selling a loan or buying a loan and that sort of thing. We'll get a little bit more into that as we go through.

 

Ricky Shah, Esq.:

Okay, the actual requirement is that it needs to be recorded onto the property and mailed to the borrower. So again, the statute because of the definition of borrower includes the successor and interest. That sort of means it should be mailed to every borrower, including the predecessor borrower. So it should be including all the borrowers on the loan. Well aware of the fact that it's going to be difficult to find. It's going to be difficult to have notes about this. Make sure when you purchase the loan, there has to be just records if you can't have it, it also requires a notice to be done to the borrower telling the borrower if there was an admitted unlawful practice or any servicer in the past is misrepresented, then the borrower can petition for relief. The question is then do you have to certify about the conduct of past borrowers? This has been sort of disputed back and forth. The statute says the servicer needs to qualify about themselves, but the conduct can allege by any servicer in the chain. If you know a past servicer, if the past servicer will give you a certification saying they didn't do anything, that's probably best to build it all together and put that as part of the recording at the beginning.

 

Melissa C. Martorella, Esq.:

Sorry. So this certification has to go out. What's interesting with it is you can't threaten a foreclosure anymore, so you can't send a demands letter saying, Hey, you're in default. We might foreclose, but then you can't send this certification too early because that would certainly be threatening a foreclosure, but it has to be done before you start a foreclosure. So it's something that we're in practice recording just prior to the NOD, so that way we're not threatening a foreclosure, we are just foreclosing. It's just interesting as far as the timing on this certification requirement and the way that it's written to figure out when you should be doing this and when you should be doing the certification. Some best practices, if you are currently in a foreclosure and you've just recorded the NOD, you could withdraw the NOD, record that certification and start over, especially if you had done it in the last month or so or right before the law passed.

 

(16:53)

That might be something that you want to do just to start fresh and make sure you're in compliance with AB 130. If it was recorded before July 1st when this law came into effect, you could also try to record the certificate of compliance just immediately or along with the notice of sale to at least substantially comply with the statute, especially if there's something, say you had recorded the notice of default in February, maybe you entered into a forbearance agreement for a period of time and agreed not to proceed with the NOS. This law passed out of nowhere and now you're like, well, I don't want to restart the NOD. We're in this forbearance or whatnot. You could consider recording it right away for at least substantial compliance, whether that this is some of that litigation that I'm sure Ricky will see in the future, whether that argument is bought by the courts or not is something to consider, but that is potentially an option to you. But definitely withdrawing the NOD and recording and starting over is probably the safest option. But yeah, so we have those options. If you have already proceeded to NOS, that's also an interesting situation as well where at that time too, it's an interesting consideration because should you then have to cancel a sale that maybe you've postponed for a few months? That's another one where we could again, argue substantial compliance, record the certification immediately, and hopefully that works for those foreclosures that have kind of been lingering for some time, but that is a consideration to have. Yeah. Ricky, anything else that you'd like to add here?

 

Ricky Shah, Esq.:

I mean, this will be commented later. It's just sort of the fact that the borrower can petition to undo a completed non-judicial foreclosure is a reason why it's probably better to be much more conservative. Withdraw the NOD and record it, because even if you proceed to sale, the fact that they can undo the whole thing is going to be a problem.

 

Melissa C. Martorella, Esq.:

Exactly. Awesome. Some other loan considerations. So just big picture now, if you are in the habit of making junior liens, this is something to really be aware of as you're making these loans going forward. So even if you've got servicing figured out at the time of loan origination and make sure you prepare hello, goodbye letters every time servicing is planned to change, talk to your servicers about this and make sure they're providing statements if required, that sort of thing. If you sell even a portion of the interest of the loan, it's better to just over disclose and say, Hey, we've sold a portion of interest. Even if arguably it doesn't apply to a business purpose loan, it's good to probably over disclose in this sort of situation so that you have complied as best as possible with AB 130, but definitely on the servicing side, making sure those hello goodbye letters are in place.

 

Melissa C. Martorella, Esq.:

Talking to your borrowers, I think it is probably out of the norm to go three years without talking to your borrower in writing, but potentially that does happen. But make sure you're doing those communications, sending statements and being in contact with your borrowers and trying to comply with those items that we outlined earlier. Trying to do that as best as possible so that if and when you do have to foreclose, you can easily do that certification prior to the foreclosure. Another interesting topic to consider are loan sales. So if you're selling or purchasing a loan, make sure that you handle those notifications and changing to servicing if that's changing as part of the sale. So if a foreclosure happens down the line, you can comply with the AB 130 requirements. Also that change in ownership of the loan of the lender on the loan, that's also a good thing to advise that borrower of.

 

Melissa C. Martorella, Esq.:

So just something that you definitely, as you're going through this loan sale consideration in California, especially for junior loans, be thinking about that. If you're purchasing a junior loan in California, I would recommend as part of that loan purchase to review the servicing that has been done on the loan to make sure if you had to foreclose, you can meet those certification requirements. As Ricky said, maybe get some sort of affirmation from the selling lender that they will be able to certify what they have done. You can consider getting an indemnification, a discount or some other remedy from the selling party if you can't prove that AB 130 was met. So just know that those are things that might be popping up now if you're purchasing a loan, the kind of things to look into, and then sellers of the loan know that these may be negotiated issues during that sale process, so just be aware of that and be ready to provide servicing statements and history and those sorts of things so that if that purchaser of that junior lien needed to foreclose, they can comply with AB 130 and if they can't know that these are items that might be negotiated during that loan sale process.

 

Ricky Shah, Esq.:

So now we get to the big question, so what can the borrower actually do because of AB 130, again, the main issue is they can petition to undo a completed non-judicial foreclosure. What can happen if a certification was not recorded? Obviously it has to be recorded. Again, the timeline being after July 1st if there was an unlawful practice, there's no timeline on this, so it basically applies to an unlawful alleged. Again, unlawful practice I'm using in quotes because that's just the statutory term. Even if the practice was done before July 1st, so if June 30th there was some sort of, you haven't been three years communicating that they can petition, we don't know exactly what that means, what that requires, where that goes, but we'll see again, if the certification misrepresents the compliance history, which means you certify saying that I didn't do anything and the borrower claims that, Hey, you did and you did an unlawful practice and therefore the compliance history is not accurate or prior services compliance history is not accurate.

 

Ricky Shah, Esq.:

It'll create all sorts of headaches on this kind of thing. Borrowers can make all sorts of challenges. The one thing that's interesting is there's an exemption if there's been a trust, so it does not affect a trustee sale or sale to a bonafide purchaser. That's how it cannot be undone. Now what that means in practicality is you want to have a trustee sale to organize it. On the other hand, if you're going to just foreclose yourself, then you try to sell to a bonafide purchaser and get this out of the way. The problem is, of course, if it's an actual bonafide purchaser, the borrower can come in there and basically sue you and the buyer of the property and throw it in there. What we sort of suggest with clients is you might want to have a sister company, a different entity, and there's sort of an in-office bonafide purchaser transfer.

 

Ricky Shah, Esq.:

You want to document the sale price. You want to put the documentation together because if they try to attack the bonafide purchaser from the litigator's perspective, I would be able to defend it on behalf of both sides of the transaction. It's sort of cheaper on that end, and we would try to probably get out of the pendens fight earlier and easier and try to force the borrower to perhaps hire an expert, get into engagement issues and kind of then have to waste. Again, I'm trying to avoid the lender shouldn't be trying to have to get an expert witness early on and we waste 15, 20 grand. We're trying to figure out a way to strategize this so that you can have the borrower to have to put it up there, and if you can do that, I think it's possible. Then say it's been at this new entity that's the bonafide purchaser that gives you a timeline to then properly sell the property rather than try to do a fire sale at the immediate time period.

 

Ricky Shah, Esq.:

So that sort of strategy with that undoing. Now the other portion of that matters is that under AB 130, if the borrower files for a restraining order, temporary restraining order, it is going to be granted. Now, by law, it used to be you would argue the merits of decision and you could defend it and say, look, the borrower screwed everything up. None of this is real, get out of it. But now it's mandatory. The statutory language says until a final determination on the petition has been made, that's not clear. It's very vague. It doesn't match what normally is done. So usually in California you would have a TRO then a preliminary injunction like three, four weeks later, and at the injunction stage we could probably then proceed to the foreclosure and get out of this, but we're going to see how courts determine what final determination means.

 

Ricky Shah, Esq.:

It could mean temporary restraining order. It could be an expungement, it can be that kind of mechanics or I could see sort of certain courts, certain areas will take it as I need the actual trial and the actual case solved, which might take two years, three years. Then only then I'll let you foreclose. You need to actually litigate the whole thing through. Hopefully courts don't do that, but again, we'll see how these things sort of play out at the beginning. Again, along with the temporary restraining order, the courts are allowed to add per the statute additional measures, they can force you to change the arrears. They can tell you that they don't want you to charge interest, they don't want you to charge penalties. They can completely borrow foreclosure or they can sort of subject you to other compliance and corrections and requirements and sort of keep you trapped in sort of a game with the court to be able to foreclose in the case. Now, the statute also says if you try to get out of this by doing a judicial foreclosure, it's an affirmative defense if there was an unlawful practice. So what does that mean? We're not sure yet. It's not going to be, the statute doesn't allow you to flip and sort of cancel a judicial foreclosure, so it's just going to be a damages calculation from what I can see, but we'll have to see how as this thing plays out in the next few years.

 

Melissa C. Martorella, Esq.:

Yeah, lots of unknowns here unfortunately, but definitely something that we will keep you all apprised of and I'm sure as we encounter our first foreclosures that face AB 130 in potential litigation that goes through that, we will provide the updates that we can as far as strategies moving forward and that sort of thing.

 

Ricky Shah, Esq.:

Actually, one thing I forgot, so one common fact pattern we see is that the junior loan, again, these subordinate loans that we're talking about right now proceeds to a foreclosure while they're also defaulting on the senior and because the senior foreclosures, yeah, your junior's wiped out, so there is no exemption for this. You're trapped. You're going to not be allowed to foreclose. So the question is how do you handle this? There's sort of two ways of practically doing it. One is you buy the foreclosure auction, you can't credit bid, you're a junior, so you just buy it to try to salvage this and you get the property. The second one is you want to take over the first loan. You do not want to purchase it out and eliminate the first because again, if you're the junior at the time of recording, the fact that you moved up a position solves nothing. You're still stuck under the statute. You want to basically take over the rights for the first and let then run the first loan and the first foreclosure through because then you're not subject to the statute. It's a very tight distinction, but it's significantly matters.

 

Melissa C. Martorella, Esq.:

Absolutely, and so for a lot of you junior lenders out there with senior loans that are in default, you're wondering what to do. Yes, as Ricky mentioned, you're going to have to comply with AB 130 when those senior lenders it gives you, it makes it a little bit harder for you to kind of run through that timeline and try to beat them to the sale. So it's also something where you'll be wanting to talk to those senior lenders and try to figure out a way to protect your interests. As a junior lender, you are entitled to things like payoffs and reinstatements from the first to protect your lien. So those are things to potentially consider to start at least protecting your lien from a senior foreclosure as you're trying to figure out how to navigate AB 130 and potentially even entering into some sort of tri-party agreement with the senior lenders or that sort of thing as you're navigating your default.

 

Melissa C. Martorella, Esq.:

That's what we have for you today. We'll do q and A in just a second here, so if you have any specific questions, feel free to put them into that q and a box. In the meantime though, next week fort's having their Innovate conference will be in Newport at the VEA Hotel. It'll be a lot of fun next Thursday, Friday. I hope to see you all there. If you have not registered yet and you are hoping to see me and Ricky in person and ask us other questions, we are happy to do so. If you go to fort con.com, you can still purchase tickets. They're on sale for 9 95. Feel free to do that and head over there. We would love to see you and chat in person. Otherwise, if you have any other questions, we'll go ahead to the q and a. Now, if you have any questions after the fact though that you've forgotten about or come to you as you're on a walk tomorrow or something, feel free, take our contact information, email us.

 

Melissa C. Martorella, Esq.:

We are happy to answer those questions for you, or if you have a situation that you don't want to put in the q and a, we're happy to answer those for you. So we'll go ahead and get started here. I'll start with the first one and we'll switch off on our q and as. So the first question here is, will third party servicers certify the servicing history whether they are the original servicer or not? This is the ultimate attorney answer, but it really depends right on that servicer and what their counsel is telling them and whether or not they will do that. So I suggest you reach out to your services now if you have a concern about this and ask them what they plan to do with regards to AB 130 if they have not already put out information, but ultimately that's what they will be deciding to do and it's not our call, although as Ricky did mention, they should be service or certifying the entire history of the loan. So if they're not comfortable doing that, that may be something where they will just not provide the certification to begin with.

 

Ricky Shah, Esq.:

Well, I think the other issue is also that the borrower's going to make the allegations no matter what. So if the borrower alleges that the prior servicer, even though they did it, they missed data, the compliance history, you're going to end up in some sort of dispute about it. At least in my practice, sort of the way art works is that we would basically reach out to you first and ask you what is your relationship with the servicer? Do you have want me to just do third party subpoenas and be insanely aggressive as a litigator or is it, can we do this informally and work out sort of fact pattern and try to negotiate it around? So it's really hard to plan out that far in advance. Okay, so I'll answer the second question, which is, well, I'll read the second question out loud, which is does the law apply to commercial non-residential property? Again, it only applies to residential property. I think there might be disputes about mixed use properties or might be disputes about, but if it's commercial, like Melissa said, none of this applies to you. That's just it.

 

Melissa C. Martorella, Esq.:

Next question, I've heard that in the NOD or in other communications that the threat of foreclosure is not allowed until the NOD is filed. Is that true? And that's kind of what we were talking about is you really can't, in those demand letters and prior communications, you really can't threaten that foreclosure anymore even though that's likely the action that you're about to take. So the recommendation that we have is still send your demand letters, don't mention foreclosure, but say a lender will be taking appropriate recourse available to them or something like that, but you can't be threatening foreclosure and then record that certification just prior to recording the notice of default would be our recommendation there.

 

Ricky Shah, Esq.:

Okay. The next question is what do you think will happen with the major banks or with their large lines of exposure equity lines in California? I think both Melissa and I are like, we don't know. It just depends.

 

Melissa C. Martorella, Esq.:

Yeah. Unfortunately I do not represent major banks. I don't know their strategy. I'm sure they will come out with something and as other webinars and other groups have talked about this 81 30 and how it affected our industry, kind of slid in under the radar. I'm sure a lot of the major banks and that sort of thing maybe didn't understand that this was happening and didn't have enough time to lobby or petition against this. I would hope that they see this now and help us take action to try to combat this and change this law, but otherwise I have no idea what their plan of attack will be on equity lines. I next question. If you make a loan first in line behind an IRS lien and clear the IRS lien, would AB 130 consider you to be in second position? I think it's if you're just a junior mortgage, and so in my understanding, the IRS lien is not a mortgage and so therefore you would still be in first position and therefore AB 130 would not apply to you in that situation. Ricky, I don't know if you have a separate understanding of that.

 

Ricky Shah, Esq.:

No, I think that matches it seems to be correct.

 

Melissa C. Martorella, Esq.:

Cool.

 

Ricky Shah, Esq.:

Okay. Next question. Is it okay to threaten foreclosure before the NOD as long as you do the certification?

 

Melissa C. Martorella, Esq.:

I would say no. Unfortunately I know it's very silly, but yes, I would not recommend even mentioning foreclosure. Just stick to those general, we will proceed with recourse options available to us, but otherwise that certification has to happen right before you do the NOD, so it's almost blindsiding the borrower that you're even considering recording a notice of default the way the statute's written. How do you protect yourself to prove the borrower received what you certified to and subsequently to pass orders of the loan? I may actually kick this over to you, Ricky, what would you be No, that's fine. For,

 

Ricky Shah, Esq.:

I mean, look, this is part of it is going to be they're going to claim three days ago I had a telephone call and they threatened foreclose before they do the sort of and even if, how do you prove that this becomes discovery and litigation? The best thing is you can document the hell out of the file, keep this in order, keep this paperwork together and be prepared. It's one of those things borrower's, counselors are going to do cookie cutter complaints that allege everything. It's going to be hard if not possible to sort of say prior loan, prior servicer did something, borrower's counsel if they'll make all sorts of allegations about the prior servicers. It really depends which judge we get, which court we get, how the courts are going to take this issue or not. The best strategy I would have is if you have a factual background of the borrower constantly screwing around, constantly being late, constantly being in default. If we can build up a story on our side, that's just better. That's all we can do.

 

Melissa C. Martorella, Esq.:

Absolutely, and as Ricky mentioned too, just have that paper trail in place. Save those emails or those letters that you sent, save copies of the proof of mailing. If you are doing that, save that somewhere so that if down the line the borrower reaches out and says, you've never talked to me once in this whole thing, well now you have a treasure trove of evidence to say, yes I did and to combat that. So as much as organized as you can be I think is really helpful to kind of contest a borrower claim like that.

 

Melissa C. Martorella, Esq.:

Next question. I'm actually not sure how to answer this one. How does the law apply to some of the subject to loans out there? I don't think I understand what you are asking, so Cindy, if you could maybe restate your question that would be really helpful. I want to make sure I can try to address it, but I don't actually know how to answer this question. Just jumping to the next one, will the county recorders accept the certificate of compliance to be recorded? Do the counties have a provision to record this new type of document? We've recorded it prior to some foreclosure sales that we have completed. I believe they've been in LA and orange counties, so I know at least there the county recorder's office are accepting it and recording it. As far as a new provision or a certain form type document, I don't know. I just know what we provided and that it has been accepted for recording

 

Ricky Shah, Esq.:

And I guess from the litigator's perspective as we don't know what the courts are going to interpret the actual format of the compliance, it's the statute's broad. It just says a certification that these things haven't been done. Again, borrower's counsel is going to allege no matter what you certify essentially you didn't do something. Kind of just expect that.

 

Melissa C. Martorella, Esq.:

Right,

 

Ricky Shah, Esq.:

So you should record something if you didn't record anything. That makes it very difficult to get around. Alright, so next question. I'll answer I guess it looks like, okay, so it's a long question. You have a second mortgage loan on a borrower's investment property. The borrower not sent statements prior to acquisition loan. The borrower signed a loan mod made payments until April sent all the statements we acquired. Can the borrower claim there were no statements sent prior to 2022 and get relief? Again? The entire statute just says the borrower can, if they will seek to borrow the foreclosure, it's going to be restrained. That's by statute. If they want to seek to overturn the petition, it just says they can seek to overturn, overturn a non-judicial foreclosure. We don't know what the additional requirements courts are going to come up with on this issue. And then otherwise, yes, you can make a complaint that lies, that's just the truth. Borrowers will do that and they will say nothing happened and then you have to prove what happened.

 

Ricky Shah, Esq.:

I'm not sure what more specific we can say, but yes, they can claim all sorts of things. They can claim nothing was statements were sent. We have to then as the lender put together a file and say, look, this was statements were sent, this was sent every month, this was sent this time, and then see how the court reacts as to is there damages, is this worth anything? What's the remedy for this kind of non statement that was done during a time period. It was not required and although it's an unlawful practice as of July 1st it was conduct done beforehand years ago ago. Sensible courts should treat that as what it sounds like. That doesn't mean we always have sensible courts because this is California.

 

Melissa C. Martorella, Esq.:

Exactly, and I think to help out your answer here too is if the facts here are correct, you've been sending statements since you acquired the loan in 2022, you've been sending regular statements. Barr signed a mod and made payments up until April. So clearly there's that communication back and forth. So sure when you do the certification and if you're foreclosing and you don't know if the lender prior to you and the servicer prior to you is sending statements communicating with the borrower, you can't certify to that, right? Because you don't know what happened prior to that. So you can say prior to 2022, we are unsure if this was complied with When you do that certification, as Ricky mentioned, the borrower might try to, excuse me, stop the foreclosure, prevent it from proceeding by saying, Hey, under AB 130 you didn't do these things, but you have a really good history here that's showing, well, for three years we were communicating with you, you were making payments, you were doing everything, so if there are any damages, it's not because three and a half years ago a lender didn't send you statements and that sort of thing.

 

Melissa C. Martorella, Esq.:

So these facts are good for you. I would say so even if the borrower tries to borrow that foreclosure, I would hope that Ricky would have a good time arguing this one to help you out and try to mitigate any sort of damage or delay in that sort of thing. On this one next one, what if we have a first trustee deed but it was crossed in second with a different property? Would AB 130 apply? Yes, it would. As far as that second property that's in second position, so for the first position loan, you could foreclose on that as usual, but say you want to foreclose on that, the other property that's in second, then all of the AB 130 requirements would indeed imply.

 

Ricky Shah, Esq.:

Okay. Next question is can you have or do you have a template when selling the loan and changing servicing? I will defer to Melissa. I'm sure we do or we can.

 

Melissa C. Martorella, Esq.:

We do. We have hello goodbye letters, so we can definitely help that out. If you need that, Mitch, feel free to reach out also in our, yeah, we can definitely provide something like that for you to use. Also in general servicers, as you're changing servicing companies, you can usually ask them to send a hello goodbye letter to comply with this requirement as well, but if you need a document, feel free to reach out and we can help with that. If you're communicating by email and the borrower changes his email and you are unaware of the change and the borrower states no communication, what is your process to prove the communication? I'll defer that to Ricky.

 

Ricky Shah, Esq.:

I mean there's borrowers that move, they don't give a forwarding address and things don't work anymore. If you're communicating my email, again, this would just be documentation wise. We would just go to the court and be like, here's the email, and I kept emailing. I kept emailing, I kept emailing. That's the proof. It's a question of, then again, it's one of those where the borrowers are going to start off with complaints that allege all sorts of things. They're probably going to start wording it, did not comply, did not communicate fully, did not communicate there. They'll adjust it as things go, as these play out early ones are just going to be the allegations broadly that you never communicated again. Also reminder though, the statute is that you need to communicate in writing in the past three years, so if your email communications are considered writing and there have been debates on stat, whether or not that's a writing, I'd prefer you have a letter in an email communication just to make my life easier in terms of producing things. But if it's communicated by email, it's communicated in by email. If the borrower's responding back, it just sounds like a silly case in front of the judge where it's like, look, the borrower knows what's going on, what other damages, and by statute though, they're entitled to be, the foreclosure is entitled to be stayed, but how long you get stayed really, you have to build up the story on the other side. That's it.

 

Melissa C. Martorella, Esq.:

The next one, I feel like perhaps we were mentioning this oddly in the webinar, but if the statute does not affect a trustee sale, why are we concerned about it? It does affect trustee sales for sure, these non-judicial foreclosures, trustee sales that it does apply there. So I feel like we probably just misstated something and caused some confusion, so I apologize.

 

Ricky Shah, Esq.:

No, I think it was because the statute weirdly says that the borrower can overturn a non-judicial foreclosure, but this section doesn't apply to a trustee sale, so there can still stop a foreclosure. They can still do it, but they can still prevent you from being prevent a foreclosure. The question is, it's very odd. It says the statute doesn't apply to a trustee sale, so I figure the courts may take that as sort of a weird, it doesn't make sense and so it may be still applied to a trustee. As of now the statute's worded that way. It's just kind of a very, because it's again very quick rabbit statute, it's very difficult to figure out how it's going to play out. Got it.

 

Melissa C. Martorella, Esq.:

Next question, does this apply to mixed use properties? I would say since it does apply to residential properties, that's something that you're going to want to consider whether if it's something where there's commercial building, commercial space and then residential space. I mean best practice would be to comply just in case until we get some more clarity. I'm sure that's something that will either be litigated that will lead us to some more clarity about application or the statute would be revised to be more clear as to that.

 

Ricky Shah, Esq.:

Okay. The next question is, does AV one 30 apply to the construction loan to the residential additional units? I mean I think it would apply, well, I guess it would be as well. I'll let Melissa answer that. I guess.

 

Melissa C. Martorella, Esq.:

I mean if it's a junior position lien, it would apply, right? Junior lien on a residential property, it applies. If a lender signs an affidavit attesting to all of the sections here and it's later found that one of those couldn't be verified, what are the potential ramifications? I mean, Ricky, do you want to take that one or

 

Ricky Shah, Esq.:

I mean again, it's back to the same thing is the borrower can petition to overturn the non-judicial foreclosure and say that you misrepresented your compliance history, which means you attested to all the sections of the statute, but they say you're misrepresented because and you dispute it. Then you have to verify, prove it if you can. Again, if you're verifying something, I assume you have something, even if it's just a declaration from you as a lender saying, hi, when I wrote this certification, I meant something happened, so there's going to be something I'll have to work with. The questions just then becomes they can't petition it. What does that mean? Is the court going to overturn it a bonafide good faith purchaser involved and it's probably not going to Then the damage is question. There's all over the place in terms of ramifications. Yeah,

 

Melissa C. Martorella, Esq.:

Part of the unknown I think at this point, but I do think to Ricky's point, it could lead to a claim under AB 130 by the borrower and then you have to kind of litigate that out. Unfortunately, I'm assuming this is from the perspective of a second, can you still advance a delinquent first lien record the compliance docs and record the NOD? Of course, you can still absolutely do that. It's just something that you have to consider that it'll take you more time and if for example, you feel like you can't comply with AB 130 and you're concerned about that, it may cause some issues with your foreclosure and some delays there as a borrower potentially puts a hold on your foreclosure sale.

 

Ricky Shah, Esq.:

Next question is are there any provisions that allow for borrowers to recover attorney's fees? Do you anticipate this will tamp down litigation? I guess I can answer that. I mean there's nothing in the statute that allows for recovery of attorney's fees, but I assume again, the loan documents, there's going to be an attorney's fees provisioned. There's general sort of ways of, you can generally go to the court and say, this entire case is frivolous and argue that it's entirely frivolous and therefore I should get attorney's fees. That's a more difficult one, so I assume again, between the loan documents enforcing it because the actual loan that's being enforced, that'll be the attorney's fees permission. Do I think that will tamp down litigation on this? Again, it's for borrowers just stalling out the ability to foreclose that's worth it to them, and then nuisance value, they may try to get around it. Well, tamper litigators will threaten each other with, I'm going to go for attorney's fees. That's sort of standard, so it's a question of attorneys on the other side kind of know that the bigger question is also like are the borrower's judgment proof? So it's kind of a mute threat if I'm going to get a judgment against your borrower who can't pay the second mortgage. That's just what it is.

 

Melissa C. Martorella, Esq.:

I will actually push this next question over to you, Ricky as well, because I don't know anything about judicial foreclosures.

 

Ricky Shah, Esq.:

If the second foreclosure is judicially and the borrower does not respond, judgment is entered and we foreclosed. Can this be a claim that is brought later on? Again, the statute says that it is an affirmative defense to a judicial foreclosure if there is a failure to comply failure violation of the statute. So what does that mean though? Is it affirmative defense? It's like do they get damages, do they not? You're better move if you can is to figure out how to get it out to a good faith purchase for value. Then it makes the property not part of the debate. It then leads to a money issue and if it's just a money issue, borrowers tend to sort of walk off and not do as much. It's not as scary. It's not as useful, but it can be claims. Yeah, it can be brought.

 

Melissa C. Martorella, Esq.:

What do you think this law will do to major institutional lenders in their approach to HELOC loans in California? Similar to the other question before, I'm really not sure. We really don't represent many large institutional banks and that sort of thing here. That said, I mean this is definitely a consideration, right? I'm sure they will still continue to make junior lean these HELOCs in California, but it might be something where they're underwriting borrowers more heavily, putting more stringent requirements, maybe limiting the amount of the line of credit that's available, things like that so that if they have to walk away because of AB 130 and all of that. That said, I mean a lot of major institutional lenders, and especially HELOCs like this, which are consumer loans, a lot of those are going, you're already doing all of this compliance stuff. Generally you are providing servicing statements. You're doing the hello goodbye, you're doing all this stuff already. It's not really new to that space, and I would assume that most of these major banks and institutions have processes in place to handle that so that they can comply with AB 130 or if they can't right now because they don't have something in place that they would implement that so that they can continue to make these loans and be able to foreclose on them and defend any AB 130 claims. That would be my assumption there.

 

Ricky Shah, Esq.:

Let me answer Curtis's question, which was, did I say you can't buy the first to avoid delays? So again, if you have a first and you're doing the subordinate lien and both are foreclosing, normally if the borrower to sue you would be able to stop and be allowed to foreclose, but under this statute, subordinate can't. It's just barred from foreclosing, so the first is still going to get to foreclose. The borrower could argue about the first being foreclosed, but then the first actually has workable defenses. They can actually sit there and say, Hey, they have no claim. Subordinate one doesn't have that argument. They can't get around it. It's just by statute you're mandatory. So the question is if you buy it the first and then the first is gone and your proceeding with your subordinate loan, your subordinate loan, even though it moved in position when it was recorded was a subordinate loan. So you still have to follow AB 130. All this headaches are there. If you can sort of assign the rights and take over and proceed in the shoes of the first and go there, none of the AB 130 applies.

 

(54:40)

That's what I'm trying to point out. It's technical, but I think, I hope that answers the question

 

Melissa C. Martorella, Esq.:

In general though, yes, you could buy the first and if you proceed under the first, there's nothing to worry about there, but that still doesn't mean that if you want to foreclose on the second that you wouldn't have to deal with AB 130. Next question. Does AB 130 present any dangers to the first position lender for subordinate lien exists? AB 130 does not apply to the senior lien holder to the first position lien holder. The one caveat to that being is if you were in junior position at time of loan origination and became the first position lean holder, then this would apply to you. But otherwise, if you're in first position, you've always been in first position, this would not apply to you. I don't know if you have anything else to add there, Ricky, but should be good to go.

 

Ricky Shah, Esq.:

Should be fine. Okay, so Jeff's question is what happens when you fund a new first, but the existing first doesn't get removed until after payoffs of the lender's instruction? So your first is really in second. It is just one of those, it's going to be complicated at the actual time of recording wasn't a subordinate loan. You're basically arguing with the court, telling the court this was not intended to be a subordinate loan. This is not technically applies. You can go through it. It depends how the court's going to take it. I think most courts being sensible would say this was not intended to be a first, it was supposed to be removed. You can then kind of have to go back to the court and say, I want the court to declare that what was the first, or what is written as a second is not really a second, and you kind of have to then reverse it and put it more to then have your argument that none of this applies, just it puts it in pieces. The reality is you're most likely going to have a borrower's lawsuit that claims all sorts of things around it. So it's like this will be a small component of probably a till claim or something else. And if it's consumer purpose loan, I guess if it's not, that's probably going to be related to some other claims, so it'll add angles to this. That's all it's just going to do.

 

Melissa C. Martorella, Esq.:

Yeah, and what I would add to this as well is this could potentially be a title claim where if you were supposed to be, when you fund your loan, if you're supposed to be in first position, but title forgets to remove the current lien that's sitting on there and it's showing you in second, I mean, to me, that's definitely a title claim. You provide the funds it's showing on the payoff and everything. They just forgot to do a reconveyance or something like that. That could be a title claim. So I guess maybe a little bit more information needed here, but I think especially with intent behind this one, you have some good arguments in your favor here. The next question is, could you explain again, if there's a first trustee ahead of my loan and I have the resources to buy the first position, should I not pay the first off?

 

Melissa C. Martorella, Esq.:

You certainly could, but what we're saying is, so you can do that to stop a default that's on that first so that you don't get wiped out, but you still have to then comply with AB 130 and there could be delays and things like that as you're foreclosing, because if you can't attest to the things in the certification or if the borrower contest the certification, all of those things that Ricky said, you have to wait until that's all dealt with before you can finalize a foreclosure sale. So you can certainly do this. What may make more sense is to enter into some sort of agreement with the first, or if the first really is foreclosing, potentially going to that auction for the first and buying the property there, because then you will then own the property outright and even though your lien would then be wiped out, you'd become the owner of the property. So you have a lot of different options there. You can definitely buy the first position if you wanted to.

 

Ricky Shah, Esq.:

Again, borrower's counsel is going to sue to stop all foreclosure. I'm not going to stop just the supportive foreclosure and sort of let the senior foreclosure go through. So they're going to probably try to stop everybody, but if you then tell me to work out an agreement with the senior and you say, okay, hey senior, you go ahead and go to the court and tell the court, Hey, I'm allowed to proceed because I'm not subject to AB 130. At which point we kind of then work out an agreement. It's there in the background, then they're stuck litigating against us, but the property's gone. So that's great. That can be done. That's a strategy, but just I'm more conservative. You do that, proceed to wipe it out the first you do move up in position but because it was recorded differently, you're stuck with AB 130 keeping you from foreclosing. Alright, so the next question is how should we think about crosses going forward?

 

Melissa C. Martorella, Esq.:

So what I would say here, I can jump in on this one, is it's very common You want to make a loan to a borrower and that loan might be in first position on a property, but say it's something where it's going to be a fix and flip or something like that and the equity in that property just isn't there to support it right up front or you're concerned about it or whatever it is. And so you want to take a second position on another property that the borrower owns just to bolster the collateral for that loan. You can certainly still do that. There's truly nothing preventing you from making a junior lien in California. However, what I will say is bear AB 130 in mind and make sure you're servicing property properly, making sure you're talking about owners changing properly, talk to your borrower in writing, doing all of those things so that if you do have to foreclose on that second position lien on that other property, you can do the certification and have good defenses in place to contest anything that a borrower might say and any potential litigation there. So those are just more considerations to have when you're doing those cross loans.

 

Ricky Shah, Esq.:

Alright, Jonathan's question is this law is geared towards services have investors, have you had investors sign the certification, the investors sign the certification, the language that says, to the best of our knowledge, would that be substantially compliant? I guess Melissa, you can answer that. I think we had,

 

Melissa C. Martorella, Esq.:

We've had investors sign the certifications on behalf here, testing that the servicing has been done properly and that sort of thing. I don't think it necessarily requires the servicer to do the certification, although the language does gear towards servicers, but we have had the lenders on the loans do the certification to commence the foreclosure. Next one, this applies to primary residence of borrowers. If it's a junior lien on a residential property, this will apply.

 

Ricky Shah, Esq.:

Okay. Next question. Is there a legal requirement that when the lender files an N-O-D-N-O-S, they have to notify all their lien holders on the property? Does it matter if it's a request for notice has been recorded? If not, can an unify lien holder have any recourse or delay to stop the foreclosure process? That's

 

Melissa C. Martorella, Esq.:

A great question. Sort of, not to AB 130, but just the foreclosure process in general. So yes, when you record a notice of default, part of what the trustee is doing is they're getting what's called A TSG or a trustee sale guarantee, and in that it's telling the trustee who needs to be notified and in what about the foreclosure sale? So that's going to be anybody junior to the foreclosing lender and other interested parties. There are various notices that have to go out both after NOD and after NOS. So yes, if we missed somebody, there's some lien holder that somehow the TSG didn't pick up, the trustee doesn't know about, and there's an UNNOTIFIED lien holder, of course they can sue a stop or delay that foreclosure sale, but that would be pretty uncommon that that's something that would happen and we'd certainly be insured by the title company providing the TSG if they didn't find that on their search. But that's kind of an unrelated to AB 130 question,

 

Ricky Shah, Esq.:

Right? So Sean's question is, what do you mean as of recording? Again, I think the statute states that you're required to record it and sort of everything's based upon the date that these things were recorded. That's just the recorded documents with the county.

 

Melissa C. Martorella, Esq.:

Yeah, I'm otherwise not entirely sure what you're asking Sean. So if you want to give us a little bit more context. Sorry, can you still advance a delinquent first lien record compliance documents, then record the NOD? Yeah, we talked about that several times. Yes, you can do that.

 

Ricky Shah, Esq.:

Okay, Rob, again, can you cover the scenario again with strategies for senior loans, make payouts versus pay off the loans in credit agreements. I'm in third and cured defaults of second and made a payment before my NOD and NOS current sale date. Again, I think we've talked about it. There's multiple ways of handling it. It just depends which one. What you don't want is to, I just want everyone to be aware that if you sort of pay off the first and move up in position and you are now the first, that doesn't solve AB 130 problems. It just doesn't. So if you want to try to get out of AB 130, there's got to be different ways of doing it. That's the main thing.

 

Melissa C. Martorella, Esq.:

What exactly is the certificate of compliance? Great question. So basically it'll just be a document that gets recorded that says we have basically complied with the requirements under AB 130 servicing, ownership transfers, communicating with the borrower, all those other things that we put earlier in the slides. It's signed and notarized and we would record that in the property records right before we proceed with the notice of default.

 

Ricky Shah, Esq.:

Next question is can we state legal remedies instead of foreclosure?

 

Melissa C. Martorella, Esq.:

I'm assuming this is for the demand letters and those sorts of things when there's a default, I kind of like that lender may take legal remedies available to them under the loan. That doesn't necessarily mean foreclosure, but at the same time if that can somehow be construed to be threatening a foreclosure, there's that. But I think I personally lean towards this sort of language. It's a little bit vague, but talks about lenders options to protect their lien interests and that sort of thing. I don't think that's unfair to say, but again, you never know if somebody could argue that this is even threatening, so I own the first and second trustee deed, which one should I foreclose on? They're both in default. Great question. So it's one of those things where, I mean if you can comply with AB 130, then my traditional advice is to foreclose your second first so that you don't wipe yourself out. And so you can do that and you'd likely take back the property and still be subject to your lien and all of that so that you can continue to be paid. Depending on how large that second lien is though, maybe it's something where you say, you know what, forget it, I'm just going to foreclose on the first, see what I can get here. Something like that. But if it is a substantial amount that you don't want to walk away for from, I would probably continue with that normal path forward, which is proceeding with the second and doing the AB 130 compliance and seeing what happens with the borrower as you foreclose

 

Ricky Shah, Esq.:

Again. So you can proceed with both. The borrower's going to sue to try to stop both on the first, the borrower has less defenses. The second I'm more concerned about there is a stay that's mandatory on the second that's just granted. So would that stay apply to the first? It should not and the court should not do it. But that doesn't mean you can get a crazy judge out of LA being California judge and just deciding that it'll apply to everything. That's just sort of the risk. It's a risk calculation that has to be there. Even if you comply completely do a proper certification, it doesn't mean the borrower's not going to claim. You verbally told me on the phone the day before you recorded that you were going to foreclose and that did everything. You can't, it's difficult to prove that you didn't have a telephone call, but that's sometimes you have to do that. Next question. If you are buying a subject to the first position loan remaining in place and then originating a junior lien in the event of foreclosure, what is the impact when the first position is still in the original borrower's name? So

 

Melissa C. Martorella, Esq.:

Cindy, I'm so sorry. I think you restated your question here and I'm still having a hard time following. This might be something where if you want to email me and maybe we can jump on a call, that might be better because I'm still not following the question here. I apologize. I don't know Ricky, if you're following it

 

Ricky Shah, Esq.:

Somewhat, it sounds like it requires any email just because it sounds like there's a borrower you're taking over a loan and then the successor and interest borrower is in play, but so many it's better with the email if you just contact us.

 

Melissa C. Martorella, Esq.:

Next question. Well this apply to all junior lien holders regardless if the loan originated as a private loan versus an institutional loan. Yep, it does. Doesn't matter. Consumer business purpose, if you're just a guy making a couple loans here and there or you're a big lender, it will apply to you if you are making a junior loan secured by residential property in California.

 

Ricky Shah, Esq.:

Next question. In cases where a modified second mortgage is recorded and treated as a new loan for accounting and tax purposes, it's still considered a continuation of the original obligation under AB 130. I mean I think it's still the modified second. Whether or not the accounting and tax purposes treat as a new loan doesn't change the recorded position.

 

Melissa C. Martorella, Esq.:

Right. So unless you refinanced and somehow ended up in first position, then that would just be a first position loan. But if it's a second loan and you're just modifying it, that's to me, yeah,

 

Ricky Shah, Esq.:

Your subordinate at the time of report, it doesn't matter. Exactly. It's the new loan subordinate. The old loan subordinate. That's just what it was. Exactly. Yeah.

 

Melissa C. Martorella, Esq.:

Okay. Is it safe to self-service? So long as I don't threaten to foreclose, it seems changing from self to a new commercial servicer introduces new complications. Either way I think is fine as long as you're communicating with the borrower, providing statements, giving them updates about what's going on with the loan, that sort of thing. I don't see a problem with that. I also don't see an issue with using a commercial servicer so long as if you've been self-servicing, making sure you're doing that transfer of service notification over to your borrower for AB 130 compliance.

 

Ricky Shah, Esq.:

Okay. And Cindy's question I think is similarly requires sort of an email to discuss it. But again, if you're buying a loan subject to the first remaining in place and then creating a second position, what is the impact that the first position remains in the original borrower's name? When you bought the loan it was subject to the borrower keeping the first and force. What if you needed to foreclose in the second? So end of the day it's still the second is subject to AB 130. You still have to put a certification, you still need to, the borrower's still going to, that is still allowed to claim that there's something wrong that didn't you misrepresented your compliance history, there's a claim. This is just adds an additional headache that borrowers can throw out there.

 

Melissa C. Martorella, Esq.:

Michael has a question here. Is this being construed to just stop a foreclosure or does this also jeopardize the loan's validity in its entirety? I don't think this is to jeopardize the loan's validity. It's just to halt the foreclosure and potentially get some damages in place if you didn't service it properly in all of these other things. But it's not necessarily to jeopardize the loan's validity, but

 

Ricky Shah, Esq.:

The prior version of the statute that was being proposed as the bill actually had it as the junior lien was deemed abandoned if you did any of these things and therefore it would've jeopardized it entirely. This is in a sense better because when we stop some foreclosure it's not great. But again, this is California, so this is take what we get is close enough.

 

Melissa C. Martorella, Esq.:

Are we aware of other states that may be considering similar requirements at this time? No, we are not.

 

Ricky Shah, Esq.:

James, ask please re-explain what a junior should do with the first foreclosing. I think we've gone over this a few times. Again, the simplest one might be just to buy it, let the first foreclose and buy it and go that way.

 

Melissa C. Martorella, Esq.:

Is it safe to continue self-servicing? So long as I don't threaten foreclosure, it seems changing to a servicer unless I need to foreclose causes new complications. I think it's fine to self-service. I also think changing to a servicer is fine too. Just like we said. Make sure you do that. Hello, goodbye letter. When you change the servicing, that'll help compliant under AB 130 and you also don't need to use a servicer to foreclose. You need a trustee to foreclose. A lot of times servicing companies are trustees and can do the foreclosure action, but you don't need them to be servicing the loan necessarily in order to foreclose. But happy to answer any questions or if you need help foreclosing, feel free to reach out and I'm happy to chat with you.

 

Ricky Shah, Esq.:

Okay, Rob's question is any issues with enforcing arbitration provisions in the loan dock into the borrower files in action? The issue I would see is the courts are not like enforce the arbitration provisions. That's one issue that's a whole different, there's a whole analysis to that provision. But the other problem is also going to an arbitrator, having an arbitrator rule on whether or not you can actually stay or proceed with foreclosure and then coming back to the court to approve of the arbitration proceeding. I think it's going to take more time than proceeding within the court to get the ability to foreclose. The arbitration provisions are not likely going to be enforceable in regards to damages and other issues. So it is one of those, I have to see the loan arbitration agreements. What's the actual theory? What's the loan diet? It is possible. There's plenty of issues with it. So that's all I can say. Rob, it's too hard for me to you a good solid answer to that question.

 

Melissa C. Martorella, Esq.:

Next one. If the law doesn't apply to business purpose laws, why would it apply to a construction loan second on apartment construction? Well, we haven't said it doesn't apply to business purpose loans. I definitely think borrowers will use this as a defense if you're not doing it. And then arguably too, in some situations on the servicing transfer one in particular, it's actually pretty unclear and I think in certain situations it may apply to business purpose loans. So just depending on the type of loan that you're doing, it may still apply there.

 

Ricky Shah, Esq.:

Again, no matter what you do, a borrower can claim you haven't spoken to me in three years in writing. It doesn't matter if there's a thousand letters that you send every day, the borrower is going to file a complaint, get a stay, and then we have to put together the paperwork saying no, here's a letter from three weeks ago. And this is silly and that's how litigation works though. Alright, so Joe's question regarding providing an ownership transfer notice we generally assign interest from one letter to another. Are we required to provide the borrower notice of this? Unless I guess it's,

 

Melissa C. Martorella, Esq.:

I would probably provide this. I mean even if in this situation for a lot of business purpose loans, you might not have to. A lot of times this is for under tila and RESPA that you have to provide the ownership transfer notice. I would still going forward do that just to be able to do the AB 130 certification. I mean you can do the certification anyways, but just to bolster that argument that we didn't even have to give you this transfer notice and we did anyways. I would probably start doing that at least while AB 130 is still a thing that we're worried about.

 

Melissa C. Martorella, Esq.:

Next question, what about loans that have been modified and stayed current for say two years to date? If before a modification the borrower is non-performing for several years and did not receive statements, can they stop paying on their current mode, file a claim even after reaffirming the debt and the modification? So they can't do anything under AB 130 until you start to foreclose. That's the whole thing. It puts a stay on that foreclosure. So there's nothing that they can just do right now with AB 130 if you haven't started a foreclosure action. So there's that. But as we talked about with the scenario earlier in the q and a, even if for the last two years you've had good servicing communications, you've been talking with the borrower, all of that going forward, but you don't know what happened before that they could still claim that there was bad servicing done at this point in time, blah, blah, blah. They could stop a sale that you're trying to do if they now go in default and that sort of thing. And then it's up to Ricky to go in there and to be like, Hey, yeah, we get it. We weren't servicing well before. However, look for the past two years we have payment histories, we have communications, we have all of this stuff in place that should mitigate any sort of damages that you're thinking of giving this borrower under AB 130 and you should allow the foreclosure sale to proceed,

 

Ricky Shah, Esq.:

Especially with the modification you would tell the court, look, there's a modification. Whatever claims or nonsense happened beforehand, it's a new modification. They sort of argued within itself. It's a new agreement. So whatever fights they should have are there. It just depends on the judge if that'll work or not. It's just, again, when you have a statute that's this vague, this sort of rapidly worded, it's really up in the air what's going to happen. Next question from Christopher is the borrower takes out a PACE loan even if a restricted buyer first. Can we consider to be a second position subject to AB 130?

 

Melissa C. Martorella, Esq.:

That's actually a great question. I haven't thought about it until you guys asked this right now. So for those that aren't aware, so PACE loans generally have super priority. So even if you're a first position lien holder, a borrower could take out a PACE loan and that loan will jump ahead of you in priority. But I think again, this could probably all be contested and as Ricky said, the borrower probably use this as a defense if you are foreclosing, but it depends at loan origination, the lien position that you were in and so you were in first position, even if you end up or in second position because of a PACE loan or because you've decided to willingly subordinate to another mortgage lien. To me AB 130 should not apply to you in that situation. Does a transfer between the lender and a wholly owned subsidiary of the lender necessitate a notice of ownership change? Again, it depends on type of loan. Here, I think in an abundance of caution is probably a good idea to send that sort of thing, but we can talk about that as far as how necessary and whether it applies to your specific loan.

 

Ricky Shah, Esq.:

Next question. If the lender has not been sending the borrower monthly statements but has been talking to the borrower, is that okay? I guess I could answer that, which is again, there's two separate provisions that are at issue right now. One is the provision that you failed to communicate in writing within three years. I assume talking includes something in writing, not just phone calls. Otherwise the separate provision is did you fail to provide a month periodic account statement to the borrower when required to by law? So then it just entirely depends whether or not it's required. And that's a complicated question.

 

Melissa C. Martorella, Esq.:

Evidence code finds writing to include electronic mail. So an email comply with the writing requirement. I think our argument would be, yeah, emails would comply as a writing.

 

Ricky Shah, Esq.:

What if we financed the loan as a first, the title found out there's a senior lien ahead of us after funding and we are able to obtain ADN fee from the title company. Do we consider it first or second?

 

Melissa C. Martorella, Esq.:

I think this is a title claim honestly. Because if your title policy says you're in first and then later down the line turns out there's a senior lien you didn't know about, well that's a title claim certainly. But if you didn't get title insurance when you financed the loan, when you made the loan, you were like, I don't need title insurance. It's crazy. But we see people do this, get title insurance people. I don't work for a title company, but if I ever did, oh my gosh, you need title insurance, please do it. It doesn't matter that it's a business purpose loan. It doesn't matter that it's a private money loan, doesn't matter any of those things. Always, always, always get title insurance for this very reason because you might think that you're in first position, you do your search, your property search online. Yeah, I'm in first position, but turns out you're not. That is what title insurance is for get title insurance because then it's a title claim. If you didn't get title insurance, you might be in second position here and be subject to AB 130.

 

Ricky Shah, Esq.:

Again, you can always file a lawsuit, seek declaratory relief to confirm that your first position that the prior one's wiped out. Maybe it's a good idea if the borrower, because the borrower's going to get named as part of the lawsuit but not really as part of the case. But it's just there. If the borrower's on board and working with you and making payments or something, that might be the best time to try that kind of stunt and keep that litigation going. It's a complete waste of time and lots of money, but it's something that's practical that might be required otherwise. I mean we're talking about the chance of a second foreclosing and then requiring this and the borrower suing. So it's like the odds of this are pretty little, but it's a possible problem. Okay, so Carlos's question is I buy the first and foreclosed and get overbid who gets the overbid funds?

 

Melissa C. Martorella, Esq.:

So at a foreclosure sale, regardless of whether you're buying the first or not. So if it's a first lien holder that's foreclosing, say the first lien holder is owed $500,000, the junior lien holder is owed $200,000 and the property sells for $600,000. The first position lien holder is paid in full. They were owed 500,000. They'll get 500,000, then there's 100,000 remaining and that will go to the junior lien holder and then the junior and anything else behind them is wiped out. If say the first position is owed 500 juniors owed 200,000, there's nothing else after that and the property sells for $800,000. So we pay off the senior for 500, we pay off the junior for 200 and then that extra $100,000 that goes to the borrower actually. So in those situations, that's very rare though that very, very extremely, I don't even think I've seen something like that because if there is that much equity in the property, the borrower is not going to let you get to a foreclosure sale.

 

Melissa C. Martorella, Esq.:

In all reality, if I own the first and second, can I just foreclose in the first and bid up the amount to include the second? No, you cannot include the junior debt in the first bidding instructions unless you actually go to the sale. So what you could do in that case is you could foreclose the first, have the auctioneer bid for you under the first up to the total amount owed on the first and say there's other bidders there that are bidding. And then at that point you could then engage yourself with bidding. So you'd have to show up to the sale with cashier's checks and that whole thing and keep bidding up to try to make sure you either get the property back or get paid off. But I would say that's pretty risky because if say you go there under the first and you're bidding or you open bidding and nobody else bids, well you get the property back, but then you've wiped yourself out. So if that's okay for you and your goal is to get the property, that's okay, but that's just something to be aware of that you might end up accidentally wiping out yourself in the process.

 

Ricky Shah, Esq.:

Next question is if you are out of compliance on a second in default, can you get into compliance before initiating the default process and be okay? Or once you are out AB 130, can you never foreclose AB 130 says if there existed a prior again unlawful practice, then you are not allowed to foreclose. That's just the way it's written. Otherwise you can certify that I didn't do something and let them go there. They'll file the client and you have to give them a notice that they can file the claim. If they file the claim, we'll come back. We'll have to fight about, okay, they're allowed to be enjoined for a temporary restraining order. Can you not do the preliminary injunction? Can you? Again, it's possible if it's a bad enough history of the borrower side, it's possible that you can get a judge. It's not so California kind of judge that will let you sort of, Hey, I'm going to let you complete the foreclosure. Whatever the non-compliance problem is, we'll deal with the damages issue separately so it can be done.

 

Melissa C. Martorella, Esq.:

Awesome. And then the last question, this is another great question that I haven't considered yet. If business purpose loan docs waive notices, do these provisions in AB 130 still apply? I think arguably you'd be okay, but yeah, go ahead Ricky.

 

Ricky Shah, Esq.:

Well, I'd say, okay, well, because the failure to communicate in writing in three years is just plain. It doesn't matter if the statute, if you have the loan document waives notice, the statute requires you to give notice and that's treated as defined as unlawful. Now, if the other provision is the required to provide periodic account statements, so if there's no requirement to provide account statements and then yeah, then you didn't do anything wrong. But I can imagine we have loans that haven't been given a written document in three years that's defined as an unlawful business practice under the statute. They can claim as unlawful business practice under the statute, courts are going to determine what that means and what's the consequences of that. So it applies, but I don't know what the functional damages from that will be or what's the remedy. That's the real issue.

 

Ricky Shah, Esq.:

Okay. Again, Richard says, you said I'm not allowed to foreclose. The law was not complied with is that forever? Again, the statute says that they're allowed, they can seek a restraining order because you failed to comply with it again if you didn't record. It's a really tough argument to make defense about. And then the question is, until the thing has been resolved, what does that mean? It's worded very differently than everything else. So I don't know if that goes to a preliminary in junction stage or if that goes to the end stage of the lawsuit, but in neither case, it's like you failed to comply with the statute, which is a requirement prior to foreclosure. You can pull the NOD and start over again, then do a NOD that says I I failed to comply with some component. Include a certification admitting what you did and try to proceed that way. I guess. Is there anything else you would say, Melissa? I think that seems right.

 

Melissa C. Martorella, Esq.:

That's probably what I would do. And with that, those are all of our questions. Thank you all. I didn't think we would be here this long with questions, but we were. If you have any others, our contact information is there. Feel free to reach out to us. We are more than happy to answer any further questions for you. Otherwise, I hope you all have a wonderful rest of your day. Thank you. Bye.