The Homeowner Bill of Rights: An Attack on Lenders’ Right to Cure Default

The Homeowner Bill of Rights (HBOR) was supposedly designed to ensure “fair” lending practices; however, far from creating fairness, it has placed a substantial burden on lenders and their ability to enforce their rights with regards to borrowers. In fact, some courts have even used HBOR to justify imposing obligations on lenders that go beyond what is prescribed by HBOR’s own provisions. Lenders should be familiar with HBOR’s provisions and the reach of the underlying policies behind the legislation.
Three key provisions in HBOR place a particular burden on lenders. First, HBOR requires lenders to provide borrowers with specific information regarding foreclosure prevention options prior to recording a notice of default. Second, HBOR prohibits dual-tracking (i.e. commencing or advancing foreclosure efforts while a loan modification application is pending). Third, HBOR requires lenders to provide a single point of reference (a person or a team familiar with the case) to borrowers attempting to
avoid foreclosure.

None of those provisions or any other provision in HBOR impose a duty on lenders to offer or approve loan modifications. However, at least one court in Northern California has recently found that HBOR’s underlying policy considerations could in fact impose such duty and allow borrowers to sue lenders for negligent handling of their loan modification process.¹  This decision creates uncertainty as to whether a lender has an obligation to modify the terms of a borrower’s loan.²  However, imposition of such an obligation would be absurd: when a lender agrees to issue a loan it does so under specific terms, if the borrower is subsequently unable to comply with those terms through no fault of the lender, the lender should have no legal obligation to modify the loan.³

HBOR is only part of a multitude of legislation enacted to regulate mortgage servicers and lenders in the aftermath of the “crash” of the housing market in 2007 and 2008. It is important for lenders to understand the complexities of the new regulations and how they have been interpreted to avoid liability and successfully enforce their rights with regards to borrowers who have defaulted on their loans.

For more information on HBOR-related issues, please call Frank J. Coughlin at (714) 558-7886.

¹  Jolley v. Chase Home Fin., LLC, 213 Cal. App. 4th 872, 903-905 (2013) (holding that, “courts should not rely mechanically on the ‘general rule’ that lenders owe no duty of care to their borrowers”; HBOR’s policy considerations support finding that a duty of care was owed by the lender with regards to borrowers loan modification).

²  See Lueras v. BAC Home Loans Servicing, LP, 221 Cal. App. 4th 49, 67 (2013) (“We disagree with Jolley to the extent it suggests a residential lender owes a common law duty of care to offer, consider, or approve a loan modification, or to explore and offer foreclosure alternatives.”).

³  See id. (“If the lender did not place the borrower in a position creating a need for a loan modification, then no moral blame would be attached to the lender’s conduct.”).