CALIFORNIA MORTGAGE FINANCE NEWS 1

CALIFORNIA MORTGAGE BANKERS ASSOCIATION

THE VOICE OF REAL ESTATE FINANCE

FA L L2 0 1 4

in this issue…CHAIRMAN’S CORNER page 1

EXECUTIVE DIRECTOR’S LETTER page 5

LEGISLATIVE REPORT page 7

RESIDENTIAL NEWS page 8

COMMERCIAL NEWS page 9

ROUNDTABLE ARTICLE page 10

LEGAL—RESIDENTIAL page 13

LEGAL—COMMERCIAL page 18

CALENDAR page 21

WELCOME NEW MEMBERS page 23

PHOTO GALLERIES page 43

ROAD TRIP page 50

Contact: California Mortgage

Bankers Association

(916) 446-7100 Phone

(916) 446-7105 Fax

info@cmba.com Email

555 Capitol Mall, Suite 440

Sacramento, CA 95814

California Mortgage Finance News is published four

times per year: Spring, Summer, Fall and Winter.

California Mortgage Finance News is published by

the California Mortgage Bankers Association.

editor: Dustin Hobbs

publisher/layout: Wolfe Design Marketing

Change! Again!

With the return

of Fall comes the

return of election

season, and this

year’s was quite

the game-changer.

Again. It seems a two-year cycle these

days that each party gets swept in a

‘wave’ only to get rejected two years

later. Unless you’ve been under a rock

for the past few weeks, you know that

the Republicans have captured control

of the U.S. Senate and several additional

state governorships. That’s certainly

the main headline, but there are several

other results that you may not be

as aware of, but could shake up our

industry even more than swapping out

Harry Reid for Mitch McConnell will.

In my backyard, in Richmond,

industry (including the CMBA) has

been diligently fighting a dangerous

eminent domain scheme designed to

help underwater borrowers by seizing

the mortgage notes from investors. If

you’ve heard this before, bear with

me! Just over a year ago, the city

seemed poised to put the plan into

action, giving mortgage investors a

hard deadline to either sell the targeted

loans to the city or face eminent

domain proceedings. That deadline

came and went with no action, in

large part due to the makeup of the

city council. Proponents of the plan

were just short (a single vote at times)

of having enough support to move

CHAIRMAN’S CORNER

Season of Change ReturnsBY CHRISTOPHER M. GEORGE, CMG FINANCIAL, CMBA CHAIRMAN

CONTINUED ON PAGE 4

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FALL 20144

CHAIRMAN’S CORNER CONTINUED FROM PAGE 1

Feeling BuriedBy New

ComplianceBy New

ComplianceBy New

Demands?ComplianceDemands?

Compliance

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Call (916) 446-7100for more details!

forward with eminent domain. As a

result, the plan’s supporters have spent

the past year trying to find partners

in San Francisco and other locales

that would partner with the city and

share costs and (it was hoped) liability,

essentially doing an end-run around

the unfavorable politics on the council.

That may have all changed,

however, on election night. All seven

council members were on the ballot,

either running for a different seat or

up for reelection. Although the council

seats are technically non-partisan, the

race quickly turned into an ideological

contest between a progressive ‘slate’ of

candidates and three existing council

members (Corky Boozè, Nat Bates,

and Jim Rogers) who were viewed as

more business-friendly, and had been

seen as votes against the eminent

domain program. On election night,

all three lost, and the progressive

coalition was swept into power, and

now may hold up to 6 of the 7 seats on

the council. One of the newly-elected

members of the council specifically

mentioned the plan in his post-election

comments, saying “With the new

council, Richmond will continue to

be the trendsetter for local, state and

national policies. Eminent domain is

one of those, and I think it will become

a tool the cities across the country

will use.” After a year of simmering

beneath the radar, I expect the eminent

domain issue to be back on the front

burner in 2015. Stay tuned.

In Sacramento, we did see

some change, albeit less than at the

national level or in Richmond. Gov.

Jerry Brown was reelected by a wide

margin, and the Democrats continued

to dominate all the statewide

offices. However, the calculation

may have changed a bit in the

Legislature, as Democrats lost their

2/3 ‘supermajority’ advantage in both

the Senate and the Assembly. This

means that on certain bills that require

a 2/3 vote, Republicans will regain

some bargaining power they lost two

years ago. Make sure and read Pat

Zenzola’s column to keep up on what

is happening in Sacramento now and

during the legislative session that will

start up in January.

Change is coming to CMBA

as well, and I am excited to let you

know that in 2015, we will be rolling

out some exciting new programs and

features that will enhance the value of

your membership dollars, and improve

upon the three pillars that CMBA

stands on: advocacy, education, and

connection. I don’t want to give away

too much now, but early next year

I’ll give you all the details and I trust

you’ll be as excited as I am!

Change is by its nature disruptive,

but not necessarily destructive. It

sharpens our focus and refines our

abilities. That’s true of mortgage

companies facing regulatory onslaught,

and trade groups like the California

MBA, working to find new solutions

and new ways to serve our members.

•

CALIFORNIA MORTGAGE FINANCE NEWS 5

2015 will mark the

60th anniversary

of the California

MBA! Six decades

of gradual

development to

evolve into the

association that we are today. Our

organization has weathered wars,

dramatic interest rate fluctuations,

epic bounds forward in technology,

the financial crisis of the early 2000’s

and the onslaught on legislative and

regulatory burdens that have been

placed upon the industry. Over the

years, the term “mortgage banker”

has been viewed as the catalyst for

achieving the American dream, as well

as the cause for global financial crisis.

Through the best of times and the

biggest challenges the California MBA

has remained committed to providing

the strongest representation for the

mortgage industry and serves as the

organization that attracts industry

leaders from across the nation. As we

look back on our 60 years, let’s think

about how we got here.

In early 1955, with strong local

associations in both San Francisco

and Los Angeles, the leaders of the

future California MBA promoted

the idea of forming a statewide

association. The main thrust for

creating this organization came from

Urban K. Wilde, who served as the

California MBA’s first President, and

Willis Bryant, who was the first Vice

President. These individuals gathered

with other mortgage industry leaders

at the Del Monte Lodge (which is now

The Lodge at Pebble Beach) in April

1955 to form the association.

The original goals were simple:

further promote the industry (which

took many forms over the years),

establish an effective legislative

and regulatory advocacy program,

foster strong business relationships

and personal friendships among the

membership, and to attract money out

West! With so much of our legislative

and regulatory focus in recent years

on residential mortgage banking, it is

interesting to note that the founders,

in part, created the California

Mortgage Bankers Association in an

effort to attract East coast investors to

invest in commercial real estate in our

state! Granted they also saw value in

a statewide organization to represent

the real estate finance industry before

the State Legislature but strengthening

our state was a key factor.

Over the years, the California

MBA has been at the forefront of

every legislative and regulatory

proposal that’s come before our

policymakers. We’ve never strayed

from the over-arching message

of protecting access to affordable

credit for qualified borrowers. Our

organization has partnered with other

industry associations to shape the

direction of lending in California, and

we’re not done! Today our member

companies join the thousands of

people who’ve come before them

to work with our lobbying team to

formulate positions on key issues in

our state.

You cannot tell a story about

the California MBA without

mentioning the fact that it was THE

social connection for the industry

before social media! The photos of

conferences and events from the first

few decades show how close these

friendly competitors were and how

important developing and maintaining

those business relationships were

to the industry. We are still a source

of connections and pride ourselves

on offering a variety of methods to

connect with industry leaders and

fellow members.

Education has also been a focal

EXECUTIVE DIRECTOR’S LETTER

Networking. Education. Connection.From the Beginning

BY SUSAN MILAZZO, CMBA EXECUTIVE DIRECTOR

CONTINUED ON PAGE 20

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latest video updates on breaking

news, conference information, and

membership product updates.

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CALIFORNIA MORTGAGE FINANCE NEWS 7

The 2014

November general

election resulted

in a strong wave

of victories for

Republicans across

the nation, with a

gain of 7 Senate seats, 13 House seats

and 3 governorships as of this writing.

The Republican wave, however, hit a

wall at the Sierra Nevada. Governor

Jerry Brown won a historic 4th term,

beating the Republican challenger

with roughly 59% of the vote, and

Democrats were successful at sweeping

all of the other California statewide

offices—Lt. Governor, Attorney

General, Secretary of State, Controller,

Treasurer and Insurance Commissioner.

The Governor’s two priorities on the

state ballot also won by wide margins:

Proposition 1, a $7.5-billion water bond

measure, and Proposition 2, which

shores up the state’s rainy day fund.

California Republicans did make

some gains in the State Legislature,

achieving the goal of keeping the

Democrats from obtaining the two-

thirds majority in the Legislature

that they initially achieved in the

2012 elections. Political scandals,

low voter turnout and concern about

one political party having too much

power are likely contributing factors

in the failure of Democrats to regain a

supermajority in the general election.

California experienced a historic low

voter turnout of approximately 30%

on Election Day. It takes weeks after an

election to determine the final turnout

percentage but it is quite possible that

when the count is complete it will be

around 40 %. The lowest previous

turnout percentage of registered voters

in a non-presidential general election, in

2002, was 50.6%. The real importance

of Republicans denying Democrats

supermajorities in the Legislature is that

while the budget can be approved with

a simple majority, it still takes two-

thirds votes to raise taxes. That means

that any new state tax legislation, such

as split-roll changes to Proposition 13

that would raise commercial property

taxes, will most likely need to be put

on the ballot by voters’ signatures

instead of by the Legislature.

Switching gears to the legislative

session, the California Legislature

adjourned early Saturday morning of

the Labor Day weekend, concluding

its 2014 legislative session. September

30 was the last day for the Governor

to sign or veto bills passed by the

Legislature in the final days of session.

Several bills of interest to CMBA’s

members were still being considered

in the last weeks of the legislative

session, and summaries of those

measures are listed below.

AB 1393—Personal Income Taxes:

Mortgage Debt Forgiveness

Chaptered by Secretary of State—

Chapter 152, Statutes of 2014.

AB 1393 extends the exclusion

of the discharge of qualified principal

residence indebtedness for state

income tax purposes to debt that

is discharged on or after January 1,

2013, and before January 1, 2014. The

Personal Income Tax Law provides for

modified conformity to provisions of

federal income tax law relating to the

exclusion of the discharge of qualified

principal residence indebtedness

from an individual’s income if that

debt is discharged after January 1,

2007, and before January 1, 2013.

The federal American Taxpayer Relief

Act of 2012 extended the operation

of those provisions to qualified

principal residence indebtedness that

is discharged before January 1, 2014,

and AB 1393 conforms to the federal

extension. CMBA supported AB 1393,

and it has been signed into law with

an immediate effective date.

AB 1698—Voiding of False or

Forged Real Property Documents

Chaptered by Secretary of State—

Chapter 455, Statutes of 2014.

AB 1698 originally would

have required that after a person is

LEGISLATIVE REPORT

Election Results Boost Republicans in Nation, But State Bucks TrendBY PAT ZENZOLA, KP PUBLIC AFFAIRS, CMBA LEGISLATIVE COUNSEL

CONTINUED ON PAGE 21

FALL 20148

Millennials are an

important target

market in the

mortgage industry

because they

now represent

the largest pool

of potential homebuyers. Defined

between the ages of 14–34, millennials

make up a population of roughly 800

million—larger than that of the baby

boomer generation. Considered the

most educated generation to date, this

demographic requires more information,

research and brand engagement before

making a decision to purchase.

Marketing and communicating

to a younger generation commands

a very different approach to that of

other generations. Traditional forms

of marketing, such as direct mail, print

ads, or even email marketing are not as

effective with this group. Millennials

understand what spam email looks like;

they can vet it out and delete it quicker

than you could imagine. Direct mail is

also ineffective because this group goes

online to search for the information they

need. In turn, text messaging will only

be effective once a relationship has been

built. In order to earn a millennial as a

personal client, mortgage professionals

must understand and familiarize

themselves with the way this generation

engages through various media.

Millennials are really saying “don’t sell

me, engage with me.”

American Pacific Mortgage (APM)

positions itself in the front-line of social

media engagement, taking a millennial-

friendly approach with its interactions.

However, companies should refrain from

selling through social media outlets,

such as Pinterest, LinkedIn, Twitter and

Facebook, but rather use them as a way

to engage and educate this audience.

Because this generation relies heavily

on social endorsements when making

a buying decision, it is vital that your

brand is positively represented online,

both in consumer reviews and paid

media. They have grown up in an era

that has endless choices, creating a

critical need to tread lightly and patiently,

yet with clear intention. It’s very easy

to figure out if you are being sold, and

selling, as a stereotype, holds an array of

negative connotations of pushy behavior

and car salesman mentality.

So how do you communicate and

market to this core group? Positive

affirmations and social endorsements

heavily influence the buying decision of

this audience, so you need to educate

them and earn that trust to get the

commitment to purchase. Boil it down

and get simplistic: this demographic starts

its shopping process online. With the

amount of viable information accessible

to anyone, this generation capitalizes

on an unspoken expectation of limitless

search engines and readily available

information. Engaging at the pre-shopping

level will ensure the consumer receives

RESIDENTIAL NEWS

Marketing to Millennials“Don’t sell me, engage with me”

BY LEIF A. BOYD, EXECUTIVE VICE PRESIDENT OF NATIONAL PRODUCTION, AMERICAN PACIFIC MORTGAGE CORPORATION

positive brand exposure early in their

decision-making process. When engaging,

keep in mind that these individuals are

searching for who they know and who

they can trust, so be familiar and honest

100 percent of the time. They are saying

“engage with me as a consumer, show

me what I need to know, educate me and

help me understand.”

Some consumers may be

unaware of the many advantages of

homeownership; such as: property

selection, customization and investment

opportunities. Although the thrill of

owning a home can seem attractive

to a prospective client, they must

also be educated about the process

and requirements to purchasing their

first home. As a generation who may

have some of the highest debt levels

in history, including student loans

and credit card debt, these potential

homeowners will need guidance to

manage their debt-to-income ratio,

spending habits and ideal credit balances

to maintain. Loan officers experiencing

success with the millennial generation

are the ones providing the most

valuable education. Take a consultative

approach based on this generation’s

communication preferences and create

deep, long-lasting relationships by

developing a personal connection

with each of your customers. Invest in

building these relationships and they

will invest in what you have to offer.

•

CALIFORNIA MORTGAGE FINANCE NEWS 9

COMMERCIAL NEWS

Top Trends to Look for in Commercial Lending in 2015BY ALEXA MIZRAHI, SENIOR LOAN OFFICER, LONE OAK FUND

As 2014 comes

to a close, it’s

important for

mortgage brokers

to recognize and

understand how

the commercial

real estate industry is shifting in order

to best leverage the increasing lending

competition and produce strong

results for their clients.

Niche Lending is on the Rise

Many new hard money lenders

have entered the market in the last

year, giving investors and developers

plenty of alternative financing options.

This increase is forcing lenders to

become more aggressive and creative

in both pricing and leverage.

From the lender’s perspective, it’s no

longer enough to advertise competitive

prices and LTVs. Today’s investors need

to get deals done quickly with experts

who understand their investment needs.

Private lenders have found that defining

a niche is key to setting themselves

apart, which is creating increased

opportunity for mortgage brokers to

find the money their clients need fast.

Lone Oak Fund, for example,

specializes in quick closes, short-term

first trust deeds of commercial and non-

owner occupied residential product.

In addition, many of these niche

CONTINUED ON PAGE 24

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ROUNDTABLE ARTICLE

Social Media and the Mortgage IndustryEDITOR’S NOTE—This is the latest in a series dealing with the issues facing the real estate finance industry. Each issue we touch on

a different topic, asking CMBA’s experts for their thoughts on the issue at hand. In this issue of CMFN, we ask three experts about social

media and its role on the mortgage industry. The topic was addressed further in a recent webinar hosted by CMBA’s Mortgage Quality &

Compliance Committee (MQAC). Jonathan Cannon is an Associate with BuckleySandler, LLP and presented on the topic during the

aforementioned webinar. Lisa Klika is SVP, Compliance & Quality Assurance with Guild Mortgage Company, and Michael Pfeifer is

CMBA’s General Counsel, and Managing Partner at Pfeifer & De La Mora, LLP.

The views and opinions expressed are solely those of the authors.

Q: What are some common

mistakes lenders and their

employees make on social media

that can put the company at risk?

Cannon: One of the most

common mistakes is for companies

and individuals to treat materials

shared on social media differently

than other public-facing materials.

Advertising is advertising, whether

it takes the form of a print ad, an

online banner ad, or a posting to

social media. Because the barriers

to entry are so low for social media

postings, lenders and their employees

may sometimes fail to recognize the

compliance obligations that still apply

to social media materials. But all

advertising has to keep in mind, for

instance, the requirements under TILA

when rates or other trigger terms

are stated, the requirements under

the SAFE Act and state laws related

to licensing disclosures, and the

requirements under the Federal Trade

Commission Act related to topics

such as deceptive advertising and the

use of testimonials.

But specifically, it may be most

common for lenders to fail to put

adequate recourses into their social

media program. Just because it may

be difficult for a lender’s compliance

department to monitor what its

branch employees may be sharing

online does not mean that the lender is

not obligated to monitor this activity.

Having strong social media policies

and procedures, along with sufficient

training and monitoring, are necessary

if a lender and its employees will be

sharing material through social media.

Klika: Social media is one of

the most challenging areas for a

lender to manage from a compliance

perspective. It is a free, accessible,

and instantaneous way for an

individual to have access to a large

population of “friends” (and foes).

In the case of a loan officer, there

is also the frequent misconception

that their posts on social media are

not considered advertisements or

otherwise regulated under state and

federal law. But in fact there are a

whole host of state and federal laws

that can govern social media activity.

The Truth in Lending Act, Gramm

Leach Bliley, and UDAAP are just a

few. Even when this is understood,

attempting to apply complex, layered,

and archaic regulatory requirements

to a 140 character “tweet” will make

any millennial roll their eyes and any

compliance officer suffer a migraine.

Social media policy and oversight

also have personnel implications.

Compliance and Human Resources

must work together to evaluate how

consumer financial protection and

employment law intersect.

Pfeifer: I define “social media” as

including the following: microblogging

websites like Facebook, Twitter,

Google Plus and My Space; Customer

review websites and bulletin

boards like Yelp, Google Local, and

Citysearch; photo and video sites

like YouTube and Flickr; professional

networking sites like LinkedIn; and

even virtual “worlds” like “Second

Life” and social games like “Farmville.”

The most common mistake lenders

and employees make is thinking

CONTINUED ON PAGE 25

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CALIFORNIA MORTGAGE FINANCE NEWS 13

What Flagstar Bank Can Teach Mortgage Servicers and Others About the CFPBBY JOSHUA dEL CASTILLO, PARTNER, & KENYON D. HARBISON, ASSOCIATE, ALLEN MATKINS

Residential

On September 29, 2014, the Consumer

Financial Protection Bureau (CFPB)

entered into a highly significant Consent

Order with Michigan-based loan

servicer, Flagstar Bank, F.S.B. (Flagstar).

Flagstar originates residential loans,

but its primary business is servicing

residential loans owned by others.

The CFPB’s enforcement effort and the

recent Consent Order related to this

business. Specifically, the CFPB alleged

that Flagstar had failed to comply with

a number of regulations regarding the

processing of borrower requests for loan

modifications. A total of $37.5 million

was assessed as a result of Flagstar’s

alleged misconduct. The most interesting

aspect of this case was arguably not

the $37.5 million damages and penalty

(though that grabbed initial headlines),

but was instead the prohibition against

Flagstar buying the right to service more

defaulted loans until Flagstar could prove

future compliance. The case provides an

important, and harsh, lesson to mortgage

servicers, and to other businesses.

The CFPB applied a number of

different rules and regulations to

Flagstar’s actions. These included 12

U.S.C. Sections 5536(a)(1)(B) & 5531(c)

(1) of the Consumer Financial Protection

Act of 2010 (CFPA), which authorize the

CFPB to punish “unfair, deceptive, or

abusive” practices. The CFPB also relied

upon the loss mitigation provisions

of the 2013 Real Estate Settlement

Procedures Act Mortgage Servicing Final

Rule (MSFR).

Pursuant to the terms of the

Consent Order, Flagstar neither

admitted nor denied any fact alleged

by the CFPB. Nothing in this article

is intended to suggest Flagstar was

guilty of any violation of applicable

regulations, or contradict anything

stated in the Consent Order. Instead,

the article highlights the consequences

of what were—as found by the CFPB—

particularly egregious violations.

As claimed by the CFPB, during

the period from 2011–2014, Flagstar

serviced loans for over 40,000

delinquent borrowers, for whom it

was responsible for administering

loss mitigation (loan modification)

applications. After the financial crisis,

even after a dramatic increase in the

volume of such applications, Flagstar

allegedly had no written policies,

and no quality assurance function.

The CFPB found that, at one point

in 2011, Flagstar had 13,000 active

loss mitigation applications, but only

25 full-time employees in its loss

mitigation department, not including a

third-party vendor in India reviewing

some applications. The average call

wait time for calls to Flagstar was 25

minutes, and almost 50% of callers

abandoned their calls. The CFPB

found that the understaffing continued

even after a 2011 restructuring, and

Flagstar routinely took more than

90 days to reach a loan modification

decision, three times the 30-day period

identified in applicable guidelines. Of

15,000 borrowers who applied for loss

mitigation, Flagstar closed more than

8,000 applications because of missing,

incomplete or expired documents.

Flagstar sometimes closed applications

due to expired documents, even where

its own delay had caused the documents

to expire, though more typically it

would require borrowers to submit

updated documents.

For a nine-month period in 2012

and 2013, Flagstar allegedly withheld

information borrowers needed to

complete their applications at all:

because of a vendor-related glitch,

Flagstar failed to send or delayed

sending its “missing document” letters to

borrowers, which were the only way a

borrower would know that documents

were missing from an application. Some

CONTINUED ON PAGE 29

WORKING TOGETHER TO HAVE A PROFOUND AND POSITIVE IMPACT ON THE LIVES OF ALL WE SERVE.

Owned by Hilltop Holdings (NYSE: HTH), PrimeLending is a national lender that is backed by strong support and long-term staying power. At the same time, loan officers are able to close loans more quickly due to our localized processing and underwriting.

PrimeLending has the best of both worlds – and we want you to be a part our team. If you’re ready to lay down your roots with a company you can trust, PrimeLending can provide you with the tools you need to grow your career with us. Come join us!

Core Convictions

• Honesty and Integrity• People Centric Culture • Agile • Service Beyond Expectations • One Team, One Purpose

PrimeLending offers:

AgilityClose loans more quickly with localized processing and underwriting.

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MarketingCreate more business with professionally designed marketing tools.

Not intended for consumer distribution. Not subject to Reg Z 1026.24. PrimeLending, a PlainsCapital Company (NMLS: 13649). PrimeLending, a PlainsCapital Company, is an equal opportunity employer and ensures that all applicants will receive consideration for employment without regard to race, color, religion, gender, national origin, age, disability, genetic, pregnancy or any other status as protected by federal, state or local law. Equal Housing Lender. © 2013 PrimeLending.

4153421694 drawitch@primelending.com www.primelending.com/ 4685 MacArthur Court #480 Newport Beach, CA 92660 NMLS: 365837

Daniel Rawitch Senior Vice President, Regional Manager

Legal

FALL 201414

Residential

First District Court of Appeal Resurrects

“Negligent Loan Servicing” TheoryBY LUKE SOSNICKI, SENIOR COUNSEL, & STEPHANIE T. YU, ASSOCIATE, DYKEMA GOSSETT, PLLC

On August 7, 2014, California’s First

District Court of Appeal opined in

Alvarez v. BAC Home Loans Servicing,

L.P that a residential mortgage servicer

may owe a borrower a duty of care

when reviewing the borrower’s

loan-modification application.1 While

the First District in Alvarez arguably

followed its own precedent, the

decision nonetheless represents a

departure from the general rule in

California that a lender owes no duty

of care to a borrower if the lender

does not exceed its “conventional role

as a lender of money.”2

Over the last few years, borrower

lawsuits relating to servicers’ reviews

of loan-modification applications

have become increasingly common.

“Negligent loan servicing” is a claim

that often appears in such suits.

One of the better defenses to these

common-law negligence claims has

been that servicers owe borrowers

no duty of care to support the claims.

The servicer would argue its actions

in reviewing a loan-modification

application were within a servicer’s

“conventional role,” the court would

conclude the servicer owed no duty

to the borrower, and the court would

thereafter likely dismiss the claim.

In February 2013, the First District

breathed some new life into the

“negligent loan servicing” theory in

Jolley v. Chase Home Finance, LLC.3

There, the Court held that a bank’s

efforts to work with the borrower

to modify a construction loan could

have created a duty of care that, if

breached, would support a negligence

claim. The Court noted both federal

and state statutes demonstrating “a

rising trend to require lenders to deal

reasonably with borrowers in default

to try to effectuate a workable loan

modification,” and, while not relying

on any of these statutes directly,

found they nonetheless “affect[ed]

the assessment” of whether the loan

servicer owed the borrower a duty.

Ultimately the Court found there was

a triable issue with respect to whether

the servicer owed a duty of care.

Jolley’s holding, however, was

then quickly reined by both federal

and other California appellate courts.

In Lueras v. BAC Home Loans Servicing,

LP,4 for example, which was decided

eight months after Jolley, the Fourth

District Court of Appeal declined

to impose a duty of care, finding

that “a loan modification is the

renegotiation of loan terms, which

falls squarely within the scope of a

lending institution’s conventional role

as a lender of money.” Lueras was

followed by numerous federal courts

in dismissing common-law negligence

claims against loan servicers.5

In Alvarez, the First District has

regained some of its lost ground.

The Court acknowledged Lueras,

but elected to follow a 2010 federal

decision instead6 that applied a six-

factor test to determine whether

a duty should be imposed for

“negligent” modification reviews. The

Court further cited to a 2009 article on

“Understanding the Financial Crisis” to

conclude that “servicers may actually

have positive incentives to misinform

and under-inform borrowers…to

save money on customer service”

and “increase the chances they will

be able to collect late fees and other

penalties.” Based in part on these

assumptions, the Court held that

borrowers’ “lack of bargaining power

coupled with conflicts of interest that

exist in the modern loan servicing

industry provide a moral imperative

that those with the controlling hand

be required to exercise reasonable

care in their dealings with borrowers

seeking a modification.”

The Alvarez decision, which is

fairly recent, has not yet been cited

in any published California appellate

decisions, and has only been cited

in a handful of federal opinions. Of

these federal opinions, some have

found ways to distinguish it,7 but the

CONTINUED ON PAGE 31

Legal

CALIFORNIA MORTGAGE FINANCE NEWS 15

Residential

Foreclosing a Junior Deed of TrustHow Will the Court Treat the Senior Deed of Trust When the Same Creditor Held Both the Senior and the Junior?

BY MATTHEW E. PODMENIK, MANAGING PARTNER, McCARTHY HOLTHUS, LLP

It is nearly

impossible to

assess the effect

that foreclosure of

a creditor’s junior

deed of trust will

have on the same

creditor’s senior deed of trust without

involving an analysis of some or all of

the following legal terms: merger of

title; merger of rights; the full credit

bid rule; anti-deficiency; the security

first rule; and maybe even dragnet

clauses. Until the Supreme Court hears

a case on this exact issue, we are left

to guess which doctrine will be used

by the lower courts.

Recently, the Second Appellate

District issued a ruling answering the

question posed in this article’s title by

applying the full credit bid rule and

prohibiting the creditor from collecting

on either the senior or junior deeds of

trust. See Najah v. Scottsdale Ins. Co.,

230 Cal.App.4th 125 (Cal. App. 2nd

Dist. 2014).

In Najah, property was owned

by Orange Crest Realty Corporation

subject to two deeds of trust; the

beneficiary of the senior was the

Lantzman Trust, and Najah was

the beneficiary of the junior deed

of trust in the original amount of

$2,550,000.00. When the Trust

instituted a non-judicial foreclosure on

the first deed of trust, Najah purchased

their note for $1,749,000 and received

an assignment of all interests in the

CONTINUED ON PAGE 32

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Legal

FALL 201416

Residential

Nevada HOA Decision Catches Eye of IndustryBY JONATHAN D. JAFFE, PARTNER, K&L GATES, LLP

A Nevada Supreme

Court opinion,

issued in September

2014, has brought

renewed focus on

the perils of making

loans on properties

subject to “super priority” homeowner

association (“HOA”) assessment liens.1

To give some perspective, this

case involved an HOA‘s foreclosure

of its $6,000 lien, which wiped out

an $880,000 first deed of trust held by

a bank (the “Bank”). While this case

involved Nevada law, it has potentially

much wider application, as there are

a number of states with HOA super

priority lien statutes.2

Background

SFR Investments Pool 1, LLC. v. U.S.

Bank, N.A. (“SFR v. U.S. Bank”) involved

a lien for unpaid HOA dues on an

individual homeowner’s property in

Nevada. The applicable Nevada statute3

provided that the lien was “prior to all

other liens and encumbrances” on the

homeowner’s property. The court was

asked to decide whether the HOA lien

was a true priority lien, such that a

foreclosure of the lien would extinguish

a first deed of trust on the property. The

court held that the HOA’s nonjudicial

foreclose extinguished the Bank’s first

deed of trust.

The dispute involved a residence

in a common-interest community.4 The

property was subject to Covenants,

Conditions, and Restrictions (“CC&Rs”)

that were recorded in 2000. In 2007, the

property was encumbered by a bank’s

(the “Bank”) first deed of trust. By 2010,

the former homeowners had defaulted

on both their HOA dues and their loan

obligations to the Bank. The HOA and the

Bank each initiated nonjudicial foreclosure

proceedings against the property.

The HOA’s trustee’s sale was held

on September 5, 2012 (before the Bank’s

sale, which was scheduled for December

19, 2012). SFR Investments Pool 1, LLC

(“SFR”) purchased the property at the

HOA’s trustee’s sale. Shortly before the

Bank’s scheduled foreclosure sale SFR

filed an action to quiet title and enjoin

that sale, alleging that the Bank had

nothing to foreclose on since the HOA

Trustee’s Deed extinguished the Bank’s

deed of trust.

Not only did the court side with the

HOA, but it held that the Nevada statute

did not permit a provision in the HOA’s

CCR’s that contractually subordinated

the HOA’s super priority lien to the

Bank’s first deed of trust.

How Did We Get Here?

Super priority lien laws have been

in place for decades. Most of these laws

are based on uniform laws, such as the

Uniform Condominium Act originally

published by the National Conference

of Commissioners on Uniform State

Laws in 1977 to bring uniformity to the

state condominium statutes. The UCA

was followed by the Uniform Planned

Community Act in 1980, and then the

Uniform Common Interest Ownership

Act promulgated in 1982 (and amended

in 1995). The scope of super priority

liens varies depending on which version

of these uniform laws a state adopted,

and whether the state adopted non-

uniform versions of the uniform law.5

So why is this only now becoming

a significant issue? The answer is tied, at

least in part, to the mortgage crisis. For

years HOAs could count on receiving

payment from the purchaser at a

lender’s foreclosure sale in a relatively

short time frame. So even though an

HOA could have taken advantage of

its super priority, it was willing to

wait. But when state legislators and

regulatory agencies started imposing

significant changes in the loss mitigation

and foreclosure processes, HOAs

found lenders sometimes taking 2,

3 or more years to foreclose. Rather

than waiting for lenders to foreclose,

HOAs initiated their own foreclosures.

Investors and speculators were able to

pick up properties at these sales for a

small fraction of their value, and quickly

recouped their investments by renting

the properties to tenants.6

What Can a Lender or Servicer Do to

Avoid This?

Can lenders and servicers take

CONTINUED ON PAGE 33

Legal

CALIFORNIA MORTGAGE FINANCE NEWS 17

New CA Statute Aims to ClarifyBorrower Intentions & Ensure Lien Releases in HELOC Payoffs

BY STUART B. WOLFE, PARTNER, WOLFE & WYMAN LLP

A new California

statue taking effect

in 2015 resolves a

practical deficiency

in California’s

current statutory

mortgage loan

payoff protocol as it applies to home

equity lines of credit (HELOCs)

and other consumer lines of credit

secured by a borrower’s residence—

namely, discerning intended

paydowns from payoffs.

California’s Existing Statutory

Payoff Scheme

Presently, California has a straight-

forward and sensible protocol for

borrowers and certain others to obtain

payoff demand statements from

existing lenders and secure a timely

lien release following a responsive

tender. (Civ. C. § 2943) For traditional

mortgages, the protocol increases

transactional efficiencies and reduces

disputes in refinance and sale escrows.

Generally, it provides a formal

process for borrowers, property

buyers, new lenders, and certain other

interested stakeholders, and their

respective agents, to request a payoff

demand statement from a borrower’s

secured creditors and requires the

creditors to respond to such requests

with a payoff demand statement

within 21 days. (Civ. C. § 2943) If the

creditor receives full payment during

the effective period of the payoff

demand statement, it has 21 days to

instruct the trustee of the deed of trust

securing the obligation to release the

lien. (Civ. C. § 2941(b)(1)) Thereafter,

the trustee has 30 days to honor the

instruction by executing and recording

a full reconveyance of deed of trust.

(Civ. C. § 2941(b)(1)(A))

Section 2943’s Deficiency: HELOC

Cancellations

As comprehensive and successful

as the existing statutory payoff

scheme is, it does not provide

assistance with certain practical

realities created by secured revolving

credit facilities, including HELOCs.

HELOC loan agreements provide

borrowers with the ability to draw

down and repay all or a portion of

a credit limit at-will. In order for a

borrower to terminate the credit

facility, HELOCs typically require the

borrower to provide the creditor with

(1) an express written cancellation

notice and (2) a tender of the

current balance. Such a cancellation

notice allows a HELOC creditor to

differentiate between a borrower’s

intent to payoff the credit facility from

merely paying down the balance. This

is significant because the former serves

to terminate the HELOC while the

later keeps it open and available for

future draws by the borrower.

One typical example of where

problems develop under the current

statutory scheme is where a HELOC

creditor receives a request for a payoff

demand statement and a full-balance

tender consistent with a responsive

payoff demand statement, but does

not receive a written cancellation

notice. Without the contractually

required cancellation notice, creditors

often assume the tender is merely

a pay-down, not a payoff and

cancellation. (Such an assumption

is consistent with the reality that

sometimes borrowers request payoff

demand statements as an exploratory

exercise and/or pending refinance or

sale escrows are sometimes aborted

or otherwise fail.) Thereafter, the

refinance or sale escrow successfully

closes, but either before or after the

closing, the borrower makes new

draws on the HELOC. Naturally, such

a set of events almost always results

in a priority dispute between the new

lender and/or owner, on the one hand,

and the pre-existing HELOC creditor,

on the other hand. It also creates

potential exposure for the escrow

agent and new title insurer.

Legislative Solution: AB 1770

Assembly Bill 1770 aims to resolve

this issue and creates Civil Code

section 2943.1.

The bill provides a statutory

mechanism to (1) suspend further

CONTINUED ON PAGE 35

Residential

Legal

FALL 201418

The Full Credit BidAvoiding (Expensive) Unintended Consequences

BY SCOTT D. ROGERS, PARTNER, & THEODORE K. KLAASSEN, SENIOR COUNSEL, RUTAN & TUCKER

Foreclosing real estate lenders are

often surprised to learn that their “full

credit bid” at a trustee’s foreclosure

sale has had expensive unintended

consequences. In the recent California

case of Najah v. Scottsdale Insurance

Company, 230 Cal.App.4th 125 (2014),

a full credit bid prevented the lender

from recovering insurance proceeds for

pre-foreclosure damage to the security

property. To avoid this and other

unintended consequences, lenders

are well-advised to understand the

legal import of a full credit bid and to

develop a comprehensive bid strategy

in advance of the trustee’s sale.

Under California law, a foreclosing

lender is permitted to credit bid at the

foreclosure sale any amount due to the

lender with respect to the defaulted

loan. This avoids the inconvenience of

a foreclosing lender having to pay cash

at the foreclosure sale only to have the

money delivered back to the lender.

The amount credit bid is treated the

same as if the lender had bid and

paid cash. A “full credit bid” occurs

when a lender credit bids the sum of

all amounts owed to the lender at the

time of sale, typically including all

unpaid principal, accrued interest, late

charges, advances, foreclosure costs,

legal fees and other sums due. As the

amount credit bid is treated the same

as cash, when a foreclosing lender

obtains title as the result of a full credit

bid, the indebtedness to the lender is

generally deemed to have been paid in

full—the “full credit bid rule.”

In the Najah case, Najah and

Akhavain (together, Najah) sold a

commercial property to Orange Crest

Realty Corporation (Orange Crest)

taking back a second deed of trust

to secure $2,550,000 of the purchase

price. After Orange Crest defaulted

under both deeds of trust, Najah

purchased the senior debt and deed

of trust, presumably to avoid having

their second deed of trust wiped out

if the first lienholder foreclosed. Najah

then instituted foreclosure proceedings

under the second deed of trust and

reacquired title to the property by

making a full credit bid of the amounts

owed under the second deed of trust

($2,878,000) at the trustee’s sale.

After getting the property back

through the trustee’s sale, Najah

brought suit against Scottsdale

Insurance Company (Scottsdale) to

collect under a commercial general

liability insurance policy issued to

Orange Crest covering the property

and naming both the senior lender and

Najah as insured mortgage holders.

Prior to the foreclosure sale, the

property had been vandalized and

many of its fixtures removed by the

principal owner of Orange Crest. The

estimated cost to repair the property

exceeded $500,000, which Najah

hoped to recover from Scottsdale.

When Scottsdale would not pay

Najah’s claim, Najah sued, and the

trial court ruled in favor of Scottsdale

and denied Najah any recovery. Najah

appealed, and the appellate court

affirmed the trial court’s judgment in

favor of Scottsdale. The appellate court

held that Najah’s full credit bid at the

foreclosure sale under the second deed

of trust precluded Najah from making a

claim on the proceeds of the Scottsdale

insurance policy. The appellate court

found that the amount payable to

Najah under the insurance policy was

limited to the amount necessary to

satisfy the debt and that because the

debt was fully satisfied through the full

credit bid, Najah had no further claim

on any insurance proceeds.

According to the appellate court,

the purpose of requiring the trustee’s

sale to be a public auction is to resolve

the question of value of the foreclosed

property through competitive bidding

at a public sale. This gives any

member of the public an opportunity

to participate in setting the value for

the property. This public value setting

provides some degree of market

protection (and transparency) for those

CONTINUED ON PAGE 36

Commercial

Legal

CALIFORNIA MORTGAGE FINANCE NEWS 19

New Markets Tax Credits

Financing OpportunitiesBY BRIAN L. HOLMAN, PARTNER, & ROBERT M. ZELLER, PARTNER, MUSICK PEELER & GARRETT LLP

Mortgage Bankers looking for a

new source of financing for projects

located in low and moderate

income communities may want to

inquire whether financing may be

available through participation in

the federal New Markets Tax Credit

(NMTC) program. Projects that

may qualify for such loans include

educational facilities, commercial

offices and retail centers, mixed use

(commercial/residential) properties,

community centers, entertainment /

cultural facilities, and health-related

facilities. This article describes the

NMTC program and how an NMTC

transaction may assist in funding the

acquisition and development of a real

estate project in a low or moderate

income community.

What is the New Markets Tax Credit?

The New Markets Tax Credit

program is intended to spur

investment of private capital into

a range of privately-managed

investment vehicles that make loans

and equity investments in businesses

operating in low- or moderate-income

areas. By making an equity investment

in a subsidiary of an eligible

“community development entity”

(“CDE”) which has been awarded an

allocation of New Market Tax Credits

Commercial

CONTINUED ON PAGE 37

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FALL 201420

EXECUTIVE DIRECTOR CONTINUES FROM PAGE 5

Look to Kinecta – Standing strong for over 70 years.

NMLS (Nationwide Mortgage Licensing System) ID: 407870. Information is intended for Mortgage Professionals only and not intended for consumer use as defined by Section 1026.2 of Regulation Z, which implements the Truth-In-Lending Act. The guidelines are subject to change without notice and are subject to Kinecta Federal Credit Union underwriting guidelines and all applicable federal and state rules and regulations. Kinecta Federal Credit Union is an FHA Approved Lending Institution, and is not acting on behalf of or at the direction of HUD/FHA or the federal government. Availability of some loan products may vary in some states/counties and loan limits may apply. Certain loans available to $3.5MM on exception. 14568-05/14

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Kinecta has been standing strong since 1940 and is one of the nation’s largest credit unions. Our solid financial foundation allows us to provide a full array of mortgages to our broker partners. Ranging from conventional, government, jumbo, and even niche product offerings, Kinecta gives you options that will help you find the right mortgage solution for clients.

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point for the association, whether

it is in the form of a conference,

webinar, or article. One of the major

elements of our mission continues

to be the dissemination of critical

industry information being provided

by leading experts and nationally

recognized professionals.

As we bring 2014 to a close, I

invite you to stay tuned for what’s

in store for the California MBA in

2015 and beyond! You will see some

exciting changes and additions that

will take us into our next decade of

service to the industry. If the mortgage

industry has been one in which you’ve

built your career then I invite you to

join your colleagues as well as those

who’ve blazed the trail for you along

the way, and be an active part of this

association. Support the organization

that supports you and your business!

•

FOLLOW CMBA ON

TWITTER!Make sure and follow CMBA

(@CAMortgBankers) on Twitter

to get the latest updates on

legislative, regulatory issues,

and conference and event info!

CALIFORNIA MORTGAGE FINANCE NEWS 21

convicted of knowingly recording or

filing a false or forged real property

instrument in any public office within

the state, the criminal court must

issue a written order that the false or

forged instrument be adjudged void

ab initio. The measure is designed to

help a homeowner or business who

has been victimized by false or forged

deeds by providing an alternative to

requiring the victim to go to civil court

for a ‘quiet title action’ at their own

expense. CMBA had concerns with

the original version of the bill because

it did not protect the rights of a good

faith transferee or obligee relative to

their interest in the real property and

their ability to enforce any obligation

incurred or secured by the underlying

property. CMBA worked with the

author of AB 1698 and the law

enforcement sponsors of the measure

to craft amendments resolving CMBA’s

concerns. The amendments provide

multiple notices to interested parties in

the real property regarding the actions

being taken by the criminal court and

provide the opportunity for those

parties to argue their position in court.

AB 2416—Employee Wage Liens on

Employer Property

On the Floor of the Senate.

AB 2416 would have allowed

an employee to place a lien for any

wages, other compensation, and related

penalties and damages owed to the

employee on the employer’s real and

LEGISLATIVE REPORT CONTINUES FROM PAGE 7

CONTINUED ON PAGE 23

December 8, 2014California MBA Legal Issues ConferenceWestin South Coast Plaza, Costa Mesa, CARegister Now at www.CMBA.com!

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FALL 201422

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CALIFORNIA MORTGAGE FINANCE NEWS 23

NEW MEMBERS

Welcome New MembersWelcome to the CMBA family!

CHERRYWOOD COMMERCIAL, LLCVictor DominguezDiamond Bar, CACommercial/Multi-Family Mortgage Banker

DEEPHAVEN MORTGAGE, LLCBrett J. HivelyCharlotte, NCResidential Mortgage Banker

THE PRIESTON GROUPLynette NelsonNovato, CAIndustry Professional Advisor

LEGISLATIVE REPORT CONTINUES FROM PAGE 21

personal property, including property

upon which the employee bestowed

labor. The amount of the lien includes

alleged unpaid wages or compensation,

penalties and damages available under

the Labor Code, interest at the same

rate as for prejudgment interest in this

state, and the costs of filing and service

of the lien. The lien attaches to all real

property owned by the employer at

the time of the filing of the notice of

lien, or that is subsequently acquired

by the employer, that is located in any

county in which the notice of lien is

recorded. The lien was originally a

super-lien, which was one of CMBA’s

main concerns with the bill, but the

super-lien provision was removed. The

lien, however, would still have applied

to unsecured loans and non-purchase

mortgage loans made on or after

January 1, 2016. In addition to removing

the super-lien provision, the author

exempted an employer’s principal

residence from coverage by the bill and

included a mechanism to enable an

employer to remove the wage lien in

certain circumstances. CMBA opposed

AB 2416, and it died in the Senate.

AB 1770—Termination of Equity

Lines of Credit

Chaptered by Secretary of State—

Chapter 206, Statutes of 2014.

AB 1770 creates a statutory

method for suspending and closing

a home equity line of credit by way

of a codified notice signed by the

borrower(s) and transmitted by an

entitled person (i.e. title company)

to the beneficiary (lender). CMBA

participated in extensive negotiations

with title industry representatives,

policy makers and legislative staff

to address CMBA concerns with

the original proposal and to reach

a compromise on the final version

of the bill that was signed into law.

This legislation is intended to reduce

litigation between lenders and title

companies that has been occurring

when lines of credit are not terminated

when real property changes

ownership. The bill also includes a

July 1, 2015 delayed effective date, a

July 1, 2019 sunset date for the statute,

and a statement that the beneficiary

may conclusively rely on the

borrower’s instruction to suspend and

close the equity line of credit provided

by the entitled person.

AB 2372—Property Taxation:

Change in Ownership

In the Senate Appropriations

Committee.

AB 2372 would have required

that when more than 90% or more

of the direct or indirect ownership

interests in a legal entity are

cumulatively transferred in one

or more transactions, the assessor

should reassess the property owned

by the legal entity as a change in

ownership, regardless of whether a

single individual acquires more than

50% of the ownership interest. The

bill specifically excluded from its

reassessment requirements publicly

traded entity stock sales. It also

specified that multiple transfers

of the same ownership interest be

counted only once in determining

whether cumulatively 90 percent

or more of the ownership interests

have transferred. AB 2372 applied to

ownership interest sales made on or

after January 1, 2015. CMBA and most

business groups did not oppose the

final version of the bill, and some, like

the California Chamber of Commerce

supported the bill as amended and

narrowed. Provisions initially of

concern to CMBA were amended

out of the final version of the bill.

Interestingly some of the consumer

tax groups that initially supported the

measure removed support or opposed

the final bill version because they did

not believe the tax provisions went

far enough on the split-roll issue. This

CONTINUED ON PAGE 24

FALL 201424

LEGISLATIVE REPORT CONTINUES FROM PAGE 23

controversy led to the bill dying in the

Senate Appropriations Committee.

AB 1513—Possession by

Declaration of Residential Property

Chaptered by Secretary of State—

Chapter 666, Statutes of 2014.

AB 1513 establishes a three

year pilot program until January 1,

2018 to facilitate removal of persons

unlawfully occupying residential

property that, pursuant to the

program, has been registered with and

verified by local law enforcement to

be vacant. The bill was sponsored by

the California Association of Realtors

and seeks to provide property owners

with an additional tool to enforce

criminal trespass laws in cities where

the so-called practice of “squatting”

by unauthorized occupants in

residential property poses a problem

to the community at large. The pilot

program applies to residential property

of one to four units, with the Cities of

Palmdale, Lancaster, and Ukiah named

as the initial cities to participate in the

program. The bill does not mandate

registration of a vacant property.

Originally the bill would have created

a felony crime for refusal to leave a

property that could have negatively

impacted servicers maintaining a

property presumed to be vacant, but

that language was removed after the

CMBA voiced concerns.

•

lenders are now working together to

provide more competitive terms. For

example, many senior lenders that

specialize in a certain product or loan

type are now partnering with junior

lenders to provide higher leverage to

get deals done.

By working with a lender or

combination of lenders with a specific

niche, mortgage brokers are better

positioned to receive quality service

and certainty of execution.

However, brokers should also be

cautious. Many new, inexperienced

lenders have entered the marketplace

in search of yield. The returns from

hard money lending are higher than the

returns these new lenders could achieve

by investing in properties. The fact is,

with sub 5 percent cap rates in many

primary markets, it is more profitable to

lend capital than it is to invest it. Many

of these new lenders have never lent

money before, and don’t have the same

experience and expertise as seasoned

companies. For this reason, it’s extremely

important for brokers and borrowers to

be diligent when seeking a new lender.

With so many new lenders

offering low rates and high leverage in

a specific niche, it’s vital that mortgage

professionals conduct careful due

diligence to find established lenders

who have a strong track record

in providing speed, service, and

assurance that their loan will close.

Creative Office Space is Hot,

Residential Investment is Cooling Off

In the current market, value-add

and development opportunities are

still in favor, while smaller residential

flips are becoming less common.

Specifically, creative office space is

increasingly becoming the hot product

type, especially as millennials become

more dominant in the workforce. As

a result of this increased demand,

commercial lenders are finding new

opportunities to expand their client

base and increase deal flow.

Alternatively, there is less

opportunity in residential investment

than in previous years. There is

significant activity in the high-end

home market, but many investors

are beginning to feel that the profit

margins may be narrowing. Mortgage

professionals should prepare themselves

now for a time when residential flips

will become less desirable for investors.

New Markets Emerging and

Development Activity Increasing

While foreign investors continue

to flock to primary markets such as Los

Angeles and San Francisco where they

are rapidly acquiring high-end homes

and multifamily product, many other

investors are looking for new options.

There is limited inventory of

quality product in primary markets

and cap rates have been compressed

to historic lows. Many investors are

migrating to secondary and tertiary

markets in search of yield.

In addition, construction and

development is stronger than ever. This

trend will continue as developers and

investors continue to have access to an

abundance of capital. Overall, developers

are extremely bullish right now. This

fact will make it very interesting to see

how the market reacts to all of the new

product being delivered in 2015.

•

COMMERCIAL NEWS CONTINUES FROM PAGE 9

CALIFORNIA MORTGAGE FINANCE NEWS 25

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that, because they are in the “cloud,”

and accessible electronically through

privately controlled means (e.g.

private smart phones, tablets, home

computers), or otherwise outside

the immediate physical premises

and obvious control of the lender,

social media somehow exist in a

“Kings X” universe exempt from the

legal and regulatory restrictions and

accountability otherwise applicable

to a lender’s business activities. In

mortgage banking, these mistakes

most often show up in the form

of personal advertising on private

websites—which may not be

vetted by lenders and is often in

violation of applicable regulations—

or in embarrassing photographs,

videos, comments, “rants,” or other

communications mistakenly thought

to be “private,” but which reflect badly

on the lender/employer or otherwise

breach some legal duty owed by the

lender or employee including, but

certainly not limited to, obligations

to maintain and protect the privacy

and confidentiality of borrower (and

lender) transactions and information.

Q: How important is it for

companies to put systems in place to

manage their social media presence?

Can you afford to just reduce your

social media footprint instead?

Klika: Unless you are a very small

company, attempting to minimize or

reduce your social media footprint

will be an uphill battle and likely

unsustainable. Even if you were able

to accomplish this, thereby reducing

your compliance risk, it may not

make good business sense. More and

more people go online to “google”

service providers, including lenders.

It’s all about having the right balance;

having controls in place and educating

employees on the correct way to

use social media, while still allowing

them to market themselves and, the

company, using social media.

It will be difficult for any lender

to administer an effective social

media compliance program without

the proper resources and tools to

manage it. A company’s executive

management must support the

program by devoting appropriate

personnel resources to the cause.

However, staffing alone may not

always be enough. More and more

third party service providers are

ROUNDTABLE ARTICLE CONTINUES FROM PAGE 10

CONTINUED ON PAGE 26

FALL 201426

taking note of this and developing

software products to assist heavily

regulated industries such as mortgage

finance with managing social

media compliance. The increasing

competition in this space is also

making these options more affordable

than in the past. Depending on a

lender’s size and how social media

is being utilized, these tools can be

critical to helping a company monitor

their exposure across multiple social

media platforms and addressing

certain regulatory requirements like

record retention.

Pfeifer: From the standpoint

of legal risk exposure and company

reputation, it is absolutely essential

for companies to put such systems

in place. Social media are now or

fast becoming the principal venues

of commerce and, unless lenders

manage their presence and activities

in such venues, their competition—or

the regulators—will do it for them.

Moreover, the multiplicity of sites and

their nearly universal accessibility,

combined with the creative variety

of ways in which these various

sites facilitate communications and

interaction, require a systematic

approach that has to consist of

much more than a few rules in

a P&P manual sitting on a shelf

somewhere. Lenders need to be “on”

the sites, if not as participants, then

at least as monitors of the activities

of their employees. This requires

appropriate tools, personnel and

management support, and may

necessitate the assistance of third

party software products or services.

I personally believe that simply

reducing a company’s “social media

footprint” is not a viable solution to

the risks posed by social media, but a

prescription for the lender’s economic

and competitive suicide.

Cannon: As we all can attest,

compliance risks are perhaps the

greatest risks facing lenders today.

While establishing policies and

procedures, training programs,

and ongoing monitoring processes

are necessary in order to craft a

compliant social media program,

these activities should be part of

the lender’s larger compliance

management system (“CMS”).

Regulators have come to expect to see

a culture of compliance throughout

the lender’s operations, not just a

narrowly focused program targeted to

one aspect of its operations.

Thus, while it is critical to

establish compliance programs for

social media, it may not be necessary

to expend more resources in this area

than in other areas. Further, the social

media compliance program should

be current, complete, effective, and

commensurate with the entity’s size

and risk profile. Of course, lenders will

always face competitive pressures to

expand their social media offerings,

and remaining out of the social

media space may not necessarily

be an option for some lenders. But

the benefits of using social media to

advertise and attract business should

be weighed against the risks.

Q: What are the key points

that regulators focus on when

examining a company’s social

media compliance?

Pfeifer: The principal focus

of mortgage banking regulators is

consumer protection and, secondarily,

enterprise safety and soundness. In

managing their social media presence,

lenders therefore need to evaluate

every social media activity and

communication from the standpoint

of its impact on consumers and the

economic viability of the lender. The

FFIEC’s Social Media Guidance (78

Fed. Reg. 76297 Dec. 17, 2013) is an

essential starting point in building

any compliance program and is

bound to become the foundation

of examination protocols for both

state and federal regulators. As set

forth in that Guidance, the list of

federal statutes and regulations

with provisions applicable to social

media activity is daunting: UDAAP,

FDIC and NCUA advertising rules,

RESPA, TILA, ECOA/FHA, FDCPA,

BSA/AML, Payment Rules (EFTA,

NACHA), Community Reinvestment

Act, GLBA Privacy and Data Security,

COPPA, CAN-SPAM and TCPA,

and FCRA. And this list does not

even include applicable provisions

of state law (including state UDAP

statutes), licensing rules like the SAFE

Act, media site platform rules and

terms of use, state and federal rules

governing sweepstakes, contests, and

other promotions, copyright laws,

defamation rules, securities laws, and

even civil litigation procedural rules

such as litigation and discovery holds

and evidence preservation rules. The

closer one looks at what is required for

adequate management of social media

risks, the more there is to see.

ROUNDTABLE ARTICLE CONTINUES FROM PAGE 25

CONTINUED ON PAGE 27

CALIFORNIA MORTGAGE FINANCE NEWS 27

Special Thanks to our 2014President’s Council Sponsors

Affinity Programwww.bankersInsuranceService.com

www.WellsFargo.com/Mortgage

Your Continued Support for California’s Real Estate Finance Industry is Greatly Appreciated!

www.AllenMatkins.com

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www.gotappraisals.com

Make sure and follow CMBA

(@CAMortgBankers) on Twitter

to get the latest updates on

legislative, regulatory issues,

and conference and event info!

Subscribe to CMBA’s official

YouTube Channel and get the

latest video updates on breaking

news, conference information, and

membership product updates.

Cannon: As with any aspect of a

lender’s operations, the lender’s social

media compliance program will likely

be examined to determine whether

it is integrated into the lender’s larger

CMS. When the CFPB (or, likely,

another regulator) examines a financial

institution such as a mortgage lender,

it will be looking for the lender’s CMS.

While no federal statute or regulation

specifically mandates that a lender

implement a CMS, the CFPB expects

every entity it supervises to have an

effective CMS adapted to its business

strategy and operations.

Consumer protection is the

overt purpose of the CFPB, and the

CFPB has emphasized that regulated

entities need to have the ability

to detect, prevent, and remedy

practices that may harm consumers.

The CFPB expects consumer

protection to be one of a lender’s top

strategic and cultural imperatives,

receiving the same emphasis as

operational considerations. The

CFPB intends for lenders to move

beyond mere technical compliance

and consider the impact of all of

their actions on consumers.

As such, when examining a

lender’s social media compliance, the

regulator will likely look for technical

compliance with, for instance, TILA’s

rules on mortgage advertising, the

FTC’s Mortgage Acts and Practices—

Advertising rule, as well as the Social

Media: Consumer Compliance Risk

Management Guidance issued by

the Federal Financial Institutions

Examination Council (FFIEC). But it

will also likely look more holistically

to ensure that social media materials

are not, for instance, inaccurately

representing the products and

ROUNDTABLE ARTICLE CONTINUES FROM PAGE 26

CONTINUED ON PAGE 28

FALL 201428

services and that social media

postings are not improperly targeting

or excluding a particular protected

class of consumers.

Klika: Regulators expect that

a lender will have a social media

compliance program which adequately

addresses its particular risk factors

(for example size and product lines).

The FFIEC’s Consumer Compliance

Risk Management Guidance is not

only a great resource for this purpose,

it is a “must read” when creating or

updating your program. Your social

media compliance program should

be comprehensive enough to cover

the various elements addressed in

this guidance (governance, policies

and procedures, training, etc.)

commensurate with your company’s

risk factors.

Finally, keeping your policy up

to date and ensuring it addresses

the latest and greatest social media

platforms that your employees may be

using is a must. Personally, you may

have little interest in virtual worlds

like Second Life, but you may need to

know if you have “avatars” offering

mortgage products to other “residents”

on the “grid”…good luck!

•

ROUNDTABLE ARTICLE CONTINUES FROM PAGE 27

Have you updated your

Membership Directory listing?

One of the benefits of your CMBA

membership is inclusion in our

online Membership Directory—

make sure your company’s info is

up to date! Email dustin@cmba.com

for more information!

CALIFORNIA MORTGAGE FINANCE NEWS 29

2955 Main Street, 2nd Floor, Irvine, CA 92614 F T: (949)720-9200 F F: (949)608-0133 F info@wolffirm.com F www.wolffirm.com

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CALIFORNIA MORTGAGE BANKERS ASSOCIATION

THE VOICE OF REAL ESTATE FINANCE

borrowers apparently never received

such a letter. Flagstar also frequently

miscalculated borrower income,

leading to improper loan modification

denials, among other things. Flagstar

also allegedly violated the MSFR in

various ways, including by deficiently

acknowledging new applications, failing

to make decisions within specified time

periods, and failing to notify certain

borrowers of their right under the MSFR

to appeal.

The CFPB filed no formal lawsuit

against Flagstar. Rather, it prosecuted

an administrative proceeding under

the CFPA, and the penalties imposed

by the CFPB were severe. As noted

above, $37.5 million was assessed

against Flagstar, comprised in part

of damages, and in part of penalties.

Specifically, Flagstar was required to

pay $27,500,000 in damages to the

CFPB, of which $20,000,000 was to be

distributed to foreclosed consumers,

and it was required to pay an additional

$10,000,000 civil penalty to the CFPB’s

Civil Penalty Fund. Flagstar was

also prohibited from deducting this

penalty from its taxes or seeking any

other indemnification. Flagstar was

also prohibited from buying the right

to service or sub-service any more

defaulted loans until it could implement

a CFPB-approved compliance plan in

connection with the Consent Order.

Flagstar was also required to implement

certain “fast-track” review procedures

for pending applications before it could

foreclose on delinquent borrowers,

and was required to undergo a detailed

compliance review in coordination

with the CFPB, wherein its Board was

required to develop a compliance plan,

which the CFPB would have to approve.

Finally, Flagstar also agreed to: (1)

two years of monitoring, (2) deliver

a copy of the Consent Order to all

in the next five years who would be

responsible for providing services

relating to the subject matter of

the Consent Order, and (3) keep all

documents relating to its compliance

with the Consent Order for at least

five years.

The two most significant aspects

of the relief secured by the CFPB are

the amount of the damages/penalty

assessed against Flagstar, but also the

ban on its acquisition of new mortgage

servicing rights on defaulted loans

pending its certified compliance with

FLAGSTAR BANK CONTINUES FROM PAGE 13

CONTINUED ON PAGE 30

FALL 201430

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CFPA and MSFR requirements. The

CFPB’s approach to Flagstar and the

nature of the relief it secured appears

to reflect a new tactic. Many mortgage

loan servicers depend upon a steady

stream of new loans, particularly

defaulted loans, because they either

originate no loans of their own, or

originate very few. While a damages

award or a penalty might be painful,

it does not necessarily interfere with

the ongoing business of a servicer. The

prohibition on Flagstar’s acquisition of

new servicing rights, however, operates

as a powerful “penalty box” that could,

theoretically, substantially compromise

a mortgage servicer’s business model

and future prospects in an important

part of the market.

Thus, the CFPB’s ability and

willingness to exercise this “penalty

box” remedy is significant, particularly

given that it could be applied to other

businesses over which the CFPB has

enforcement jurisdiction as well.

Mortgage servicers and other businesses

regulated by the CFPB should be on

notice that, at least currently, the CFPB

is willing and able to apply substantial

pressure to advance its consumer

protection mandate. The penalties

imposed on Flagstar serve as a dire

reminder of the potential consequences

of a failure to comply with evolving

consumer protection laws.

•

FLAGSTAR BANK CONTINUES FROM PAGE 29

CALIFORNIA MORTGAGE FINANCE NEWS 31

1901 Camino Vida Roble, Suite 115, Carlsbad, CA 92008 ● (877) 654-6824 www.thecompliancegroup.net

Court in at least one—Segura v. Wells

Fargo Bank, N.A.8—applied it to deny

the servicer’s motion to dismiss a

negligence claim, specifically noting

that while it was “sympathetic” to the

servicer’s position it “must be directed

by California law as established by

California courts.”9

While the full impact of Alvarez is

yet to be seen, the seemingly-divergent

positions of California’s appellate

districts, and the federal courts’ efforts

to follow (and perhaps shape) the state

law, should be carefully monitored

by servicers as this area of the law

continues to change and unfold.

•

1 (2014) 228 Cal.App.4th 941.

2 Nymark v. Heart Fed. Savings & Loan Ass’n

(1991) 231 Cal.App.3d 1089, 1096.

3 (2013) 213 Cal.App.4th 872.

4 (2013) 221 Cal.App.4th 49.

5 See, e.g., Maomanivong v. Nat’l City Mortg.

Co., 2014 U.S. Dist. LEXIS 130513 (N.D.

Cal. Sept. 15, 2014); Becker v. Wells Fargo

Bank N.A., Inc., 2014 U.S. Dist. LEXIS

109287 (E.D. Cal. Aug. 7, 2014); Gopar

v. Nationstar Mortg., LLC, 2014 U.S. Dist.

LEXIS 54420 (S.D. Cal. Apr. 17, 2014).

6 Garcia v. Ocwen Loan Servicing, LLC, 2010

U.S. Dist. LEXIS 45375 (applying six-

factor test in Biakanja v. Irving (1958) 49

Cal.2d 647, 650, to determine whether

a duty of care should be imposed, with

the factors being: [1] the extent to which

the transaction was intended to affect the

plaintiff, [2] the foreseeability of harm to

him, [3] the degree of certainty that the

plaintiff suffered injury, [4] the closeness

of the connection between the defendant’s

conduct and the injury suffered, [5] the

moral blame attached to the defendant’s

conduct, and [6] the policy of preventing

future harm.).

7 See, e.g., Colom v. Wells Fargo Home Mortg.,

Inc., 2014 U.S. Dist. LEXIS 148856 (N.D.

Cal. Oct. 20, 2014); Curl v. CitiMortgage,

Inc., 2014 U.S. Dist. LEXIS 148055 (N.D.

Cal. Oct. 17, 2014).

8 2014 U.S. Dist. LEXIS 143038 (C.D. Cal.

Sept. 26, 2014).

9 Id. at *31.

“NEGLIGENT LOAN SERVICING” CONTINUES FROM PAGE 14

FALL 201432

note and senior deed of trust. Then

Najah instituted its own non-judicial

foreclosure of the second deed of

trust and entered a credit bid for the

full amount owed on the junior deed

of trust, $2,878.060.25. Najah was

the highest bidder and took title to

the property, after which he brought

suit to collect under the property’s

insurance policy for damage allegedly

done by the borrower.

The trial court ruled in favor of

the insurance company, reasoning

that Najah’s purchase of the first note

for full value extinguished the debt

secured by the first deed of trust. See

Najah, 230 Cal.App.4th at 135 fn. 13.

As the appellate court recognized, the

trial court’s reasoning was incorrect—

interests are freely assignable without

extinguishing the obligations—

however it raises the question of

whether the trial court was attempting

to apply one of the two merger

doctrines that are often discussed in

these situations: merger of title, and

merger of rights.

Under the doctrine of merger of

title, “When a greater and lesser estate

coincide and meet in one and the same

person, in the same right without

any intermediate estate, the latter is

in law merged in the greater.” 10 Cal.

Jur. 606. In the present matter, Najah

had a lienholder’s interest against the

property he owned, thus the lesser

interest (lienholder) merged into the

greater interest (property owner).

Application of the merger of

rights would have the same result.

When property is sold via non-judicial

foreclosure, the purchaser buys

the property subject to any senior

interests—in this case, the first deed of

trust. Although not personally liable

for the obligations secured by the first

deed of trust, if the purchaser does not

pay the obligations, the beneficiary of

the first may foreclose. In the case at

issue, Najah steps into the shoes of the

original borrower and is responsible

to repay the first-position obligation.

But because Najah now owned both

the property and the first deed of trust,

in essence he owed the obligation

to himself. Thus, the rights of Najah

merge as owner of the property and

under the first deed of trust secured

against the same property.

The appellate court found that

because Najah made a full credit bid,

he was prohibited from collecting

anything further on either the first or

second. To understand the application

of the full credit bid rule, one must

keep the merger doctrines in mind

along with the stated purpose for a

non-judicial foreclosure: “to resolve

the question of value … through

competitive bidding…” Cornelison v.

Kornbluth, 15 Cal.3d 590 (Cal.1975).

When Najah bid the entire amount

owed on the second deed of trust

($2,878.060.25) he was prohibiting

anyone else from bidding less than

$4,627,000.00, as whomever bid

more than his credit bid would

buy the property subject to the

first deed of trust which was owed

$1,749,000.00. Thus, Najah’s bid

established the value of the property

as $4,627,000.00. Again, implicit

in the court’s application of this

doctrine is that a junior’s full credit

bid establishes the total indebtedness

owed on the first and second, which

equals the value that Najah placed on

the property. Thus, by becoming the

successful purchaser of the property,

the property satisfied what Najah was

owed. If Najah had been made whole

by the property, then allowing him to

recover additional money under the

insurance policy would be a windfall.

So, what is a secured creditor to

do when it holds interests in both

the first and second deeds of trust?

To assess all the possible variations

is beyond the scope of this article.

Should the creditor underbid the

junior interest? This could work,

but under a strict merger analysis, if

the property reverted to the creditor

there would be nothing left to collect.

Should the creditor instead foreclose

first on the senior, as they typically

do? This option also may limit

collection options by invoking the

sold-out junior doctrine. What about

judicially foreclosing both interests

at the same time? It may preserve

the creditor’s right to a deficiency

but would take substantially longer

and cost more. What about bidding

10% less the lessor of the fair market

value and the total indebtedness?

Obviously, there are options,

however it is uncertain how a court

may respond and what justification

they will use. What is clear, is that

a creditor facing this dilemma must

craft a specific game plan to maximize

their recovery; a one-size-fits-all

approach to bidding and foreclosing

may have unintended consequences.

•

FORECLOSING A JUNIOR DEED OF TRUST CONTINUES FROM PAGE 15

CALIFORNIA MORTGAGE FINANCE NEWS 33

proactive steps to mitigate the risk of

having their deed of trust or mortgage

being wiped out in a foreclosure sale?

To develop a mitigation plan, it is

important to first understand the scope

of the state’s super lien priority statute.

The statutes in some states arguably

create a super lien priority as to payment

only, and not as to lien position. And

some state statutes do not apply to

all common interest developments.7

Finally, some states require the HOA to

deliver notice of its foreclosure to junior

lienholders, while others do not.

Using Nevada as an example, a

lender may record a request to receive

a notice of default filed by an HOA (a

“Request”). The Request must state

the name and address of the person

recording the Request and identify the

deed of trust by stating the names of the

parties to the deed of trust, the date of

recordation, and other information. The

person recording a Request must have or

claim an interest in, or lien on, the real

property described in the deed of trust.8

And the Request must identify the lien

by stating the names of the unit’s owner

and the common-interest community.9

These requirements pose potential

traps for the unwary. If MERS is the

mortgagee of record, should the Request

reflect that notice is to go to MERS, or

to the assignee of the mortgage loan?

Even if it is acceptable to name MERS,

and MERS forwards to the current

servicer any notices MERS receives, will

the notice make it to the right person at

the servicer? Some commentators have

suggested recording (a) an assignment of

the deed of trust that reflects the current

note holder, and (b) a Request naming the

servicer as the servicing agent for the note

holder under a power of attorney, and

NEVADA HOA DECISION CONTINUES FROM PAGE 16

CONTINUED ON PAGE 34

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FALL 201434

specifying the appropriate department

within the servicer’s operations.

These are not the only issues. The

Request is supposed to reflect the owner’s

name, but what if the owner is not the

borrower? And how does the servicer

know the correct name and address of

the HOA, unless the originating lender

NEVADA HOA DECISION CONTINUES FROM PAGE 33

has obtained this information?

Another option that has been

discussed is to require the borrower

to escrow for payment of HOA

assessments. But this too poses practical

issues. How can a lender determine if

there is an HOA involved that imposes

assessments? Does state law and the

terms of the deed of trust or mortgage

permit or prohibit escrows for HOA

assessments? How can a servicer keep

updated information on the HOA

assessments, and ensure that payments

the servicer makes go to the correct

address for the HOA?

What happens if a servicer

learns of an HOA that has initiated

a foreclosure? A servicer might ask

the HOA for a statement of the super

priority lien amount so the servicer

can cure the default, but some HOAs

will not accommodate these requests

on the theories that the servicer is

not a party that is entitled under state

statute to receive payoff information,

or that providing a servicer with that

information would violate the Fair Debt

Collection Practices Act. If an HOA

does respond to the servicer’s request,

the response might be a statement of

the entire lien amount (e.g., 24 months

of assessments), and not just the super

priority lien amount (e.g., 9 months).

What should the servicer do in these

instances? There is no clear answer.

Some have suggested that to avoid a

foreclosure the servicer should pay

the entire lien amount, and then seek

judicial relief.

It’s interesting to note that in spite

of the public policy outcry over servicers

foreclosing on large liens without

engaging in adequate loss mitigation,

HOAs can foreclose on very small liens

with no similar concerns.

In any event, there are many

questions with no clear answers. Until

these issues are sorted out, lenders and

servicers are well advised to consult

with their counsel to address each of

these issues on a state-by-state basis.

•

1 SFR Investments Pool 1, LLC, Appellant v.

U.S. Bank, N.A., 130 Nev. Adv. Op. 75

(Sept. 18, 2014).

2 As just one other example, on August

28, 2014, in the case of Chase Plaza

Condominium Association, Inc. and Darcy, LLC

v. JPMorgan Chase Bank, N.A., Nos. 13-CV-

623 & 13-CV-674 (D.C. App. 2014), the

District of Columbia Court of Appeals held

that a lien for delinquent condominium

assessments recorded in 2008 had “super

priority” status over a lender’s deed of trust

recorded in 2005.

3 Nev. Rev. Stat. § 116.3116.

4 A common interest community or

development (“CID”) is a form of real

estate which is subject to a declaration

and administered by an association (such

as an HOA) where each owner holds

exclusive rights to portions of the property

(typically called a unit), and shared rights

to portions of the property (typically called

the common area). There are many forms

of CIDs, including condominiums and

planned unit developments.

5 There are approximately 23 states that

have adopted some version of these

uniform laws that provides super priority

lien status.

6 Purchasers at HOA lien sales can have

difficulty selling the property since title

insurers are often unwilling to insure the

purchaser’s title without a court order

validating the purchaser’s title.

7 For example, Washington, D.C.’s statute

appears to apply only to condominium

HOAs.

8 See Nev. Rev. Stat. §§ 107.090 and

116.31168.

9 Nev. Rev Stat § 116.31168.

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CALIFORNIA MORTGAGE FINANCE NEWS 35

draws on an existing HELOC for

at least 30 days and (2) clarify to

the HELOC holder that if a payoff

demand statement is honored by

full payment, the tender is to be

considered a cancellation of the

HELOC and not merely a pay-down

of the balance. This is accomplished

by way of a statutorily prescribed

written “Borrower’s Instruction.”1

Upon a full-balance payment in

this context, AB 1770 reaffirms the

HELOC holder’s obligation to cause

the deed of trust to be reconveyed

pursuant to Civ. C. § 2941(b)(1).

The bill implicitly anticipates

the Borrower’s Instruction will be

provided to the HELOC creditor

concurrently or shorty after a Request

for Payoff Demand Statement is made

under Civil Code section 2943. To this

end, AB 1770 requires HELOC-related

payoff demand statements to state at

least one of three designated delivery

methods2 for a Borrower’s Instruction.

The Borrower’s Instruction

must be signed by the borrower, but

it can be provided to the HELOC

creditor from certain “entitled

persons,” including escrow agents.

If it is received from an entitled

person, the creditor has the right to

“conclusively rely” on it as coming

from the borrower.

AB 1770 provides a form

Borrower’s Instructions which may

be used. The form is not mandatory;

writings substantially similar are

equally effective.

The bill covers any “revolving line

of credit used for consumer purposes,

which is secured by a mortgage or

deed of trust encumbering residential

real property consisting of one to four

dwelling units, at least one of which is

occupied by the borrower.”

The California Land Title

Association sponsored AB 1770.

According to Craig C. Page, CLTA’s

Executive Vice President and Counsel,

the bill was unopposed and passed

unanimously out of all policy

committees and both houses. Adds

Page, “The bill was one of these rare

non-partisan bills which equally helps

everyone involved in residential land

transactions. It clarifies borrower

intentions in HELOC payoffs and

increases lien release certainty.

Lenders, title insurance carriers,

escrow agents, buyers and borrowers

will all be benefited.”

Civil Code section 2943.1

becomes effective July 1, 2015 and

sunsets on July 1, 2019.

The chaptered and enrolled

version of AB 1770 can be reviewed

at http://www.leginfo.ca.gov/pub/13-

14/bill/asm/ab_1751-1800/ab_1770_

bill_20140815_chaptered.htm.

•

1 The bill defines the name of the instruction

as “Borrower’s Instruction to Suspend and

Close Equity Line of Credit” but such is

a bit misleading; a better characterizing

label might be “Borrower’s Instruction to

Suspend and Conditional Instruction to

Close Equity Line of Credit.”

2 The creditor must provide an email

address, a facsimile telephone number or a

mailing address. (Civ. C. § 2943.1(b))

NEW CA STATUTE CONTINUES FROM PAGE 17

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FALL 201436

who may be financially impacted by

the value of the foreclosed property.

As the appellate court stated: “A lender

who intends to later claim that the

value of the property was impaired

due to waste, fraud, or insured

damage, but nonetheless makes a full

credit bid, interferes with that [public

value setting] process by impeding bids

from third parties willing to pay some

amount between the value the lender

places on the property and the amount

of its full credit bid.” The appeals court

noted that a lienholder could readily

preserve its right to insurance proceeds

by bidding less than the total of all of

secured amounts.

Lenders must understand when

credit bidding that, although they

are not paying cash, they are taking

part in a market to establish property

value, and full credit bids are seen by

the courts as potentially impeding that

market. In this case, the appeals court

stated that “the effect of appellants’

[Najah’s] bidding the full amount of

their second lien, notwithstanding their

belief that the property was worth less

than the combined amount of their first

and second liens, was to block other

interested parties from participating in

setting the price for the property, and

preventing the property from going

to the party that placed the highest

actual value on it.” The appellate court

summarized its approach saying “a

lender who makes a full credit bid

despite believing the value of the

property to be impaired subverts the

integrity of the foreclosure auction

at the expense of the insurer or any

other party whom the lender intends

to pursue through legal action post-

foreclosure.” In the court’s view, having

deprived Scottsdale of the benefit of

a true public auction, Najah should

not be entitled to pursue insurance

proceeds in an amount between

what Najah freely paid to obtain the

property and the amount Najah now

claims the property to be worth.

Giving effect to the full credit

bid made by the lender, the appellate

court concluded that the value of the

property established by Najah’s credit

bid was $4,627,000 (the $2,878,000

bid by Najah at the trustee’s sale and

the $1,749,000 paid by Najah to buy

the senior lien). Consequently, as the

value of the property obtained by

Najah at the trustee’s sale was equal

to the sum of all amounts owed to

Najah, the court determined that the

indebtedness owed to Najah had been

fully satisfied and that Najah had

no claim to any potential insurance

proceeds because such proceeds

would be a double recovery for Najah.

No doubt Najah was surprised and

dismayed with the outcome of this

case. At the time of the trustee’s sale,

Najah believed the property to be worth

far less than the combined amount of

both loans due, at least in part, to the

property damage caused by Orange

Crest. Had Najah thought through

his foreclosure bid strategy, he could

easily have credit bid a much lower

amount to leave outstanding sufficient

indebtedness to allow for recovery

under the Scottsdale insurance policy.

Although the facts in Najah v.

Scottsdale are relatively uncommon,

the application of the full credit bid

rule has very broad implications for

lenders in planning their foreclosure

bid strategies. The full credit bid

rule has also been applied to prevent

foreclosing lenders from later pursuing

claims for foreclosure of additional

collateral, bad faith waste, rents held

by a receiver, fraud, mortgage bond

proceeds and negligence.

A full credit bid can also be risky

to the lender should the computation

of the full credit bid amount be

erroneously high for any reason.

This can easily occur where there

is uncertainty in the calculation of

variable and/or default rate interest

due, imposition of late charges,

recovery of attorneys fees and other

enforcement costs, reimbursement

of protective advances, etc. In the

event that the credit bid made by the

lender is subsequently determined

to have exceeded the full amount of

the indebtedness, the lender runs the

risk of being required to come out

of pocket to pay the excess to junior

lienholders or even to the borrower.

Due to the potential loss of

additional recovery rights and

exposure for payment of overbid

amounts, lenders should very carefully

plan the amount of their bid(s) at

trustee’s sales. Even in circumstances

where the value of the security

property is thought to equal or exceed

the unpaid obligations, it is generally

advisable to avoid a full credit bid to

preserve potential claims against other

security, to allow for recovery under

insurance policies or against third

parties and to avoid exposure from

an inadvertent overbid. Once again

our mothers had it right, an ounce of

prevention is worth a pound of cure.

•

FULL CREDIT BID CONTINUES FROM PAGE 18

CALIFORNIA MORTGAGE FINANCE NEWS 37

by the CDFI Fund, a program of the

U. S. Department of the Treasury

(often referred to as an “Allocatee”),

individual and corporate investors can

receive a New Markets Tax Credit

worth more than 30 percent of the

amount invested over the life of the

credit, in present value terms.

The CDEs, through subsidiaries

(“Sub-CDEs”), make loans and

equity investments in qualifying

businesses. A qualifying business

must meet certain requirements,

including location in specified low and

moderate income communities (as

determined by census information)

and must create jobs for neighborhood

residents (among other requirements,

at least 50 percent of the business’s

income must be derived from activity

in the community; a substantial

proportion of the business’s property

must be located in the community;

the employees of the business must

perform a substantial proportion of

their work in the community; and less

than 5 percent of the business’s assets

can be held in unrelated investments).

There are also restrictions prohibiting

certain business activities, including

golf courses; country clubs; massage

parlors; hot tub facilities, suntan

facilities; gambling facilities; or liquor

stores. To assure compliance, the loan

documents include various on-going

reporting requirements.

How to Get Involved in New

Markets Tax Credit Transaction

Typically, the Borrower will apply

for financing either directly to the CDE

Allocatee or to a lender, or its affiliate,

FINANCING OPPORTUNITIES CONTINUES FROM PAGE 19

CONTINUED ON PAGE 38

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FALL 201438

will refinance the project and repay the

loans made by the Sub-CDE, at least

to the extent of the then-outstanding

leverage loan amounts; the Sub-CDE

will dissolve; the investment fund will

use the proceeds of the dissolution in

part to repay the leverage lender; and

the tax credit investor will exercise a

“put” to sell its equity investment in

the investment fund to an affiliate of

the project LLC for a nominal sum.

This equity investment will have

a value equal to the excess of the

amounts owed by the project LLC

to the Sub-CDE at the time of the

project refinance over the amounts

then due from the investment fund to

the leverage lenders, less transaction

costs. By contributing this value back

to the project LLC, the affiliate can

substantially lower the project LLC’s

overall ultimate borrowing costs.

Summary

NMTC transactions are complex

and require sophisticated parties and

counsel to implement, but they can

provide significant financing and cost

savings to real estate project developers.

•

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FINANCING OPPORTUNITIES CONTINUES FROM PAGE 37

at least seven years (the “compliance

period”), and the Sub-CDE must use

most of the proceeds of the QEI to

make loans to or equity investments

in qualifying businesses. In a typical

NMTC transaction involving real

estate, the parties will form a special

purpose entity to act as the Sub-CDE.

The Sub-CDE will make acquisition

and/or construction loans to a special

purpose limited liability company (the

“project LLC”) formed for the purpose

of developing a commercial real estate

project in a low income area. The

project LLC may also obtain additional

funds from an equity investor and

from conventional mortgage loans.

The security for loans made

by the Sub-CDE is often the real

property owned by the project LLC.

Accordingly, notwithstanding the

complex structure of the investment

fund and the project LLC, the loan

documents securing the NMTC loan

include documentation familiar to

California mortgage bankers: notes,

loan agreements and deeds of trust.

Repayment to the Tax Credit

Investor and Leverage Lender

During the compliance period,

the project LLC pays interest on the

loans made by the Sub-CDE, and

the Sub-CDE makes corresponding

equity distributions to the investment

fund. The investment fund uses these

distributions to pay interest to the

leverage lender, to pay transactions

costs, and to fund any return on

investment demanded by the tax credit

investor in excess of the tax credits.

The parties expect that, at the end of

the compliance period, the project LLC

which has a working relationship with

a CDE, which lender will participate

as a “leverage lender” in the financing.

These leverage lenders are often a

bank, insurance company, a non-profit

entity, a governmental entity, or an

affiliate thereof.

Structure of New Market Tax Credit

Investment

Typically, an investor seeking to

claim the New Markets Tax Credit

(a “tax credit investor”) makes a cash

equity investment in a special-purpose

limited liability company called an

“investment fund.” The investment

fund borrows additional funds from

the leverage lender. The investment

fund then make an equity investment

(a “qualifying equity investment” or

“QEI”) in the Sub-CDE. If all goes

as planned, the tax credit investor

will be able to claim a 5 percent tax

credit on the total amount invested

in the Sub-CDE, including the tax

credit investment and the leverage

loan, for each of the first 3 following

years, and a 6 percent tax credit for

each of the next 4 following years.

For example, if the tax credit investor

invests $5 million in the investment

fund, the investment fund borrows

$15.5 million, and the investment fund

makes a $20 million qualifying equity

investment in a Sub-CDE, the tax

credit investor may claim tax credits of

$1 million per year for the next three

years and $1.2 million a year for the

next four years after that.

In order for the tax credit

investor to claim the tax credits, the

investment fund must maintain its

equity investment in the Sub-CDE for

CALIFORNIA MORTGAGE FINANCE NEWS 39

California Mortgage Bankers Association • 2014 - Media Planner / page 1 of 5

California Mortgage Bankers Association l www.cmba.comThe California Mortgage Bankers Association serves to represent the residential and commercial real estate finance industry before all governing bodies. CMBA encourages and promotes sound business practices and honesty in marketing, origination, lending and servicing of mortgage loans through our educational and networking opportunities.

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CALIFORNIA MORTGAGE BANKERS ASSOCIATION

THE VOICE OF REAL ESTATE FINANCE

2014 Media PlannerCALIFORNIA MORTGAGE BANKERS ASSOCIATION

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California mortgage finanCe news 1

CALIFORNIA MORTGAGE BANKERS ASSOCIATION

THE VOICE OF REAL ESTATE FINANCE

Fa L L2 0 1 1

in this issue...Chairman’s Corner page 1

exeCutive DireCtor’s Letter page 4

LegisLative report page 5

resiDentiaL news page 6

CommerCiaL news page 8

rounDtabLe artiCLe page 9

DeLinquenCy survey page 10

CaLenDar page 11

weLCome new members page 12

roaD trip page 18

photo gaLLery page 21

Contact: California Mortgage Bankers Association

(916) 446-7100 Phone

(916) 446-7105 fax

info@cmba.com email

555 Capitol mall, suite 440

sacramento, Ca 95814

California mortgage finance news is published four

times per year: spring, summer, fall and winter.

California mortgage finance news is published by

the California mortgage Bankers association.

editor: Dustin Hobbs

publisher/layout: wolfe Design marketing

A few weeks

ago, one of the

authors of the

Wall Street Reform

and Consumer

Protection Act of

2010 (Dodd-Frank)

wrote a determined defense of the law

in one of the leading newspapers in the

country. One of the main purposes of

the article, it seemed, was to counter

a ‘myth’ that the law has caused

uncertainty in the economy, leading

to the current sluggish growth rates.

The article highlighted the fact that

while most in the business community

(and certainly in the real estate finance

industry) see uncertainty as a major

stumbling block to growth, many policy

makers and commentators believe

that the specter of uncertainty is either

exaggerated or a ‘myth.’ Therefore, it is

important that we do our best to explain

just what we mean by ‘uncertainty,’

both in the residential and commercial/

multi-family sides of the business.

First and foremost, of course, is

the 2,000+ page Dodd-Frank law that a

former Treasury Department official has

described as a ‘tsunami of change.’ The

bill will eventually spawn thousands

of pages of rules that will take years

to promulgate and implement, and

between normal turnover at the relevant

regulators and possible changes in the

White House and Congress, how can

we even guess what the regulatory

atmosphere will look like in 12 months,

two years, and beyond? The bottom

line is that businesses are inherently

future-looking, trying to make decisions

(hire/expand or sit tight/contract?)

based on what the market will look

like. This is what some seem to have

trouble grasping – the author of the

article mentioned above attempts to

defend Dodd-Frank from the uncertainty

attack by describing how few rules

have actually been written: “…even

though only 10 percent of Dodd-Frank’s

provisions have been implemented

so far, critics claim that the law

perpetuates ‘job-killing uncertainty.’”

CHairman’s Corner

is Uncertainty Just a myth?by tom DuDLey, Cmba Chairman, newmark reaLty CapitaL, inC.

ContinUeD on Page 3

CALIFORNIA MORTGAGE BANKERS ASSOCIATION

THE VOICE OF REAL ESTATE FINANCE 2014

Buyer’s Guide

California Mortgage Finance

CMBA Legislative &Buyer’s Guide

&

CALIFORNIA MORTGAGE FINANCE NEWS 41

2014 theMes And deAdlines

space reservation: February 12, 2014Artwork deadline: February 28, 2014Published: March 19, 2013

*Winter 2014Theme: Residential Originationspace reservation: January 29, 2014Artwork deadline: February 8, 2014Published: February 18 2014

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*summer 2014Theme: Commercial / Multifamilyspace reservation: July 28, 2014Artwork deadline: August 8, 2014Published: August 18, 2014

*Fall 2014Theme: Legislative/Regulatory/Compliancespace reservation: October 24, 2014Artwork deadline: november 7, 2014Published: November 17, 2014

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Full page $690 525 ½ page $415 310 1/3 page $305 230

*4X rate is the same as getting one ad FREE - 25% discount.

CoLor ChArGES – Add to the applicable rates above for each insertion: $100 for full pg., $75 for 1/2 pg., and $50 for 1/3 pg.

CoVErS / PREMIUM POSITIONSCoVErs: Cover position are 15% more than the standard rate. Please contact us for availability.

Ad size (1X) (6X) (12x)Banner $500 350 245 Includes a link to your website.

nOte: All rates are CMBA Member-only rates. non-members, add 15%.

For advertising questions / reservations: (530) 642-0111 / granger@cwo.com

Ad rAtes - Prices reflect per issue rate

CALiForniA MortgAgE FinAnCE nEws

pAyMents

The California Mortgage Bankers Association will email an invoice upon ad confirmation. Payment can be made by check or credit card: MasterCard, VISA or American Express. For insertions in more than one issue, you can pay per issue or for the full contract. All payments will be payable to CMBA. A copy of the issue will be sent to the advertiser’s address(es) provided.

Approval: Acceptance of advertising is subject to approval by publisher. E-NEwS (Electronic Bulletin)

Please submit contracts, insertion orders, confirmations and artwork to:

Diana GrangerPublishers advertising representativegranger@cwo.com(530) 642-0111 • (530) 622-6033 FAX1347 Martin Lane, Placerville, CA 95667

VALUE-ADDED ADVERtiSER BONUSES!

CALiForniA MortgAgE FinAnCE nEws insErtion BonUs: When you advertise in four issues of California Mortgage Finance News publication you save with a 25% discount per issue (see rates on the right). This translates into a FREE ad! Plus, when you advertise in four issues you receive a FREE banner ad in E-News.

SAViNGS SuMMAry:Advertise in four issues and receive a 25% discount (same as one FREE ad) and receive a FrEE banner ad for one month in E-News. - a $500+ value for FREE!

SUBmiSSiON mEthODS

Contact: granger@cwo.com / 530-642-0111 • CMBA 2014 Media Planner / page 4 of 5

California Mortgage Bankers Association 2014 Media Planner

you decide the impact you want to make!

CALIFORNIA MORTGAGE FINANCE NEWS 43

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AUGUST 28, 2014, OFFICES OF SMITH DOLLAR PC, SANTA ROSA, CA

CMBA Regional Networking Series Present: Santa Rosa After Hours

A very busy few months started with one of our free networking events in

Northern California, at the offices of Smith Dollar PC on August 28th.

The event was a great way to bring Bay Area real estate pros together for

casual conversation and refreshments.

Meeting new friends and stirring up old friendships is what the events are

all about!

Thanks very much to Rachel Dollar and Glen Smith for their hospitality

and support!

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SEPTEMBER 3, 2014, OFFICES OF ALLEN MATKINS, LOS ANGELES, CA

CMBA Regional Networking Series Present: Los Angeles After Hours

As a way to kick off our annual Western States CREF Conference later

that month, Gold Sponsors Allen Makins hosted back-to-back networking

events, starting in their Los Angeles offices on September 3rd.Friends old and new.

Reps from Northmarq, GE Capital and ODIC Environmental and Energy

enjoyed good company and a good time thanks to our hosts!

NXT Capital and Greystone were also well-represented at the event.

CALIFORNIA MORTGAGE FINANCE NEWS 45

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SEPTEMBER 3, 2014, OFFICES OF ALLEN MATKINS, SAN FRANCISCO, CA

CMBA Regional Networking Series Present: San Francisco After Hours

Just one week later, in San Francisco, Allen Matkins graciously hosted

another free networking event!

The networking events brought together friends and colleagues from across

the San Francisco Bay Area.

2013-2014 CMBA Chairman Dennis Sidbury of Northmarq Capital with Fabio Baum of Opus Bank.

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SEPTEMBER 17-19, 2014, LAS VEGAS, NV

17th Annual Western States CREF Conference

This year’s annual Western States CREF Conference kicked off with a great economic panel highlighted by presentations from Heitman’s Mary Ludgin

and Esmael Adibi of Chapman University. Photo from left: Kevin Randles, CMBA Commercial/Multi-Family President, CBRE; Ludgin; Adibi; Jeff

Burns, Conference Chairman, Walker & Dunlop.

The conference is not possible without the support of our great sponsors,

including David Rosenthal and Curtis-Rosenthal, Inc., which has

sponsored the event since the very first one, 17 years ago! From left:

Rosenthal; Sherry Lake.

Our top sponsor this year was Umpqua Bank – thanks so much for your

support!

CALIFORNIA MORTGAGE FINANCE NEWS 47

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SEPTEMBER 17-19, 2014, LAS VEGAS, NV

17th Annual Western States CREF Conference (continued)

One of the more highly-anticipated panels this year was focused on

permanent loan finance, featuring top experts such as (from left): Jeffrey

Salladin, Hudson Advisors, LLC; Kieran Quinn, Guggenheim Partners;

Jaime Zadra, Prudential Mortgage Capital Company; Roddy O’Neal,

Goldman Sachs Commercial Mortgage Capital, LP; David Moehring,

Union Bank.

Another one of our great sponsors, JCR Capital and Jay Rollins (left).

The conference concluded with a panel on multihousing lending, featuring

(from left): Rob Noble, Umpqua Bank; Rick Wolf, Greystone; Phyllis Klein,

Fannie Mae; Rich Martinez, Freddie Mac; Kirk Kniss, New York Life.

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OCTOBER 2, 2014, OFFICES OF SPIEGEL ACCOUNTANCY CORP., WALNUT CREEK, CA

CMBA Regional Networking Series Presents: Walnut Creek After Hours

Our next free networking event was at the offices of Spiegel Accountancy

Corp in Walnut Creek!

Thanks to Jeff Spiegel (left) and his team for their hospitality and support!

The event is the second networking event Spiegel has held for us in the

past two years, and it was a big success again!Industry pros enjoyed some refreshments and great conversation.

CALIFORNIA MORTGAGE FINANCE NEWS 49

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OCTOBER 9, 2014, CENTER CLUB, COSTA MESA, CA

CMBA Regional Networking Series Presents: Costa Mesa After Hours

Our next free networking event was on October 9th in Costa Mesa at the fabulous Center Club! The event brought together residential and commercial

real estate finance pros from across Orange County!

Big thanks to our hosts and sponsors Essent Guaranty and Geraci Law

Firm for their generosity!

Make sure to stay tuned to www.CMBA.com to find out about our next

FREE networking event!

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OCTOBER 14, 2014, OFFICES OF BUCKLEYSANDLER, LLP, SANTA MONICA, CA

CMBA Regional Networking Series Presents: Santa Monica After Hours

Down south, in Santa Monica, our next free networking event was hosted

by law firm BuckleySandler.

An enjoyable time was had by all, connecting friends and colleagues!

CMBA Directors Scott Whittle, Incal Associates, Ltd (left) and Art Shafer

of Comerica Bank (right).Thanks again to Clint Rockwell (center) and the BuckleySandler team for

hosting a great event!

CALIFORNIA MORTGAGE FINANCE NEWS 51

Building Stronger Partnerships

The CMBA Road Trip continued with a stop at the Los Angeles offices of

Bolour Associates. A privately-owned real estate investment, development

and finance company, Bolour Associates has been a CMBA member for

a number of years and has been a big supporter of our annual Western

States CREF Conference. Big thanks to Elliot Shirwo and team Bolour for

their time and participation with CMBA! For more information, call (323)

677-0550 or go to www.bolourassociates.com.

Next, Susan visited the offices of Koss REsource, meeting with Samson

Lov and his team. Koss REsource is a commercial real estate website for

financing, networking, listing, and information, and CMBA has enjoyed

partnering with the company to provide our members with discounted rates

with Koss, and the company has also participated as a sponsor of the

Western States CREF Conference for the past few years. To find out more,

go to www.KossREsource.com.

CALIFORNIA MORTGAGE BANKERS ASSOCIATION555 Capitol Mall, Suite 440Sacramento, CA 95814

Epstein Turner WeissA ProfEssionAl CorPorATion

California Law Firm Serving the Mortgage Lending Community

CMBA member David Epstein is the partner heading the firm’s practice in:

• Lien priority and title resolution• Insurance and title insurance coverage• Mortgage repurchase and warehouse lending• Loan fraud• Real estate litigation• HBOR, QWR, and GLB issues• Business and commercial law

Epstein Turner Weiss is a Los Angeles-based law firm concentrating in mortgage, real estate, title insurance, business and employment defense.

We are experienced counsel in mortgage, title and real property litigation in state and federal court at the trial and appellate levels.

Contact David Epstein atDBE@EpsteinTurnerWeiss.com

We are proud to be aCMBA member.

PARTnERs

David B. EpsteinJonathan M. TurnerMichael R. Weiss

633 West Fifth street

Suite 3330

Los Angeles, CA 90071

Phone: 213-861-7487

Fax: 213-861-7488

www.epsteinturnerweiss.com