California Enacts New Law Affecting Properties Acquired Through Foreclosure (senate Bill 1137)

California today enacted legislation aimed at minimizing the adverse effects of foreclosures on local communities.  The legislation increases the responsibilities of lenders owning property acquired through foreclosure.  There are three primary components of the new law.

The first requires that lenders make several attempts to contact borrowers in foreclosure at least 30 days prior to filing a notice of default.  Once borrowers are contacted lenders are required to assess the financial situation of the borrower, discuss options that could avoid foreclosure possibly facilitating the modification or restructuring of loans.

The second component authorizes government entities to assess fines of up to $1,000 per day per occurrence for failing to maintain property acquired through foreclosure.  Items subject to fine include permitting excessive foliage growth, failing to take action to prevent trespassers or squatters from remaining on the property, failure to take action to prevent mosquito larvae from growing in standing water, or tolerating other conditions that create a public nuisance. 

Thirdly, the bill extends the time from 30 days to 60 days that a tenant or subtenant (at the time the property is sold) has to remove himself or herself from the property.  This provision does not apply if any party to the note remains as a tenant, subtenant or occupant.  In other words, the borrower is not afforded this same grace period.   

This bill will likely affect the behavior of lenders approach to borrowers in default.  It creates additional incentives to avert foreclosure by modification or other options.  By requiring lenders to contact borrowers and discuss options it is hoped that more modifications will be concluded allowing homeowners to remain homeowners.  It also adds to the timeline of the foreclosure process making it more costly for a lender to foreclose encouraging modifications.  Further, by granting municipalities authority to impose fines, lenders may see more risk and expense to owning properties thereby encouraging more modifications for borrowers in decent financial standing.  Lastly allowing tenants to stay in properties longer suggests that lenders may be required to wait longer before marketing properties since occupied properties are typically less marketable than vacant properties.

This is a condensed discussion of the law.  For those interested the full legislation is posted on