By: T. Robert Finlay, General Counsel for the CMA and Partner at Wright, Finlay & Zak, LLP

On January 7, 2025, wildfires swept across parts of Los Angeles, destroying homes and causing unprecedented destruction. In the aftermath, the lending community in those affected areas immediately pulled together, voluntarily forbearing from declaring loans in default, foreclosing or evicting. Meanwhile, California’s legislature convened in Sacramento to mandate similar requirements via Senate Bill 238. Unfortunately, SB 238’s initial draft was far too broad and left too many provisions unclear, which would have made implementation nearly impossible.

With the help of our Liz Knight and the CMA’s Legislative Committee and our lobbyist, Mike Belote, and, in conjunction with a coalition of industry groups, we were collectively able to narrow the scope of the proposed bill and provide concrete guidance on its application. While the final version of SB 238 has not yet been signed by the Governor, we expect the final rules to be substantially the same as the current version. Below are some highlights of SB 238. Please feel free to check back at any time for further updates.

What Borrowers and Which Loans are Covered?

  • Borrower is defined as “a natural person” who is the mortgagor, trustor or one who holds a power of attorney for the mortgage or truster. SB 238, which has been labeled “The Mortgage Forbearance Act” (“MFA”) does not apply to:
    • Successors to the borrower.
    • Entities
    • A borrower who has, in writing or via handing over the keys, surrendered the property.
    • A borrower who, prior to January 7, 2025, had a Notice of Default recorded (unless the NOD has since been rescinded).
  • Only applies to loans that are secured by residential property improved by four or fewer residential units. Accordingly, the MFA appears not to apply to:
    • Unimproved vacant land.
    • Commercial property.
    • Residential properties with more than 4 residential units.
  • Applies to any licensed lender or servicer. MFA appears not to apply to non-licensed lenders servicing their own loans.

 

How Does a Borrower on a Covered Loan Invoke the MFA?

“A borrower who is experiencing financial hardship that prevents the borrower from making timely payments on a residential mortgage loan due directly to the wildfire disaster may request forbearance on the residential mortgage loan by doing both of the following:

(1) Submitting a request to the borrower’s mortgage loan servicer before the earlier of either of the following:

(A) Six months after the date upon which the state of emergency issued by Governor Gavin Newsom on January 7, 2025, is terminated.

(B) January 7, 2027.

(2) Affirming that the borrower is experiencing a financial hardship due to the wildfire disaster.”

Note – the “affirmation” does not appear to have to be under penalty of perjury.

 

What Happens After the Borrower Requests a Forbearance?

Upon receiving a forbearance request, the servicer must:

  • Notify the borrower within five (5) business days whether the forbearance request has been approved. If the request is denied due to a curable defect in the request, e.g. incomplete information, the servicer must give the borrower the twenty one (21) calendar days to cure the defect and, then respond to the revised request within five (5) business days.
  • If the forbearance request is approved, the servicer shall offer mortgage payment forbearance for a period of up to an initial 90 days, which shall be extended at the request of the borrower in 90-day increments, up to a maximum forbearance period of 12 months.
    • Exception: “If the mortgage servicer, acting under delegated authority to make forbearance determinations on behalf of the investor, denies a forbearance request, the mortgage servicer shall not be in violation of this section if the mortgage servicer provides written notice to the borrower stating the specific reason for denial. The notice shall include both of the following:
      • (1) A clear and concise explanation of the specific investor provision that requires denial.
      • (2) The text of the servicing guidelines describing the disaster-related forbearance relief.”

Note: The MFA specifically states that “[i]t is the intent of the Legislature that a mortgage servicer offer a borrower forbearance that is consistent with the mortgage servicer’s contractual or other authority. Nothing in this title requires a mortgage servicer to take any action that would require the mortgage servicer to breach the terms of an existing contract with the investor that owns the residential mortgage loan.”

  • The servicer gets credit for any voluntary forbearance already given the borrower.

What Servicers Can and Cannot Due During the Forbearance Period?

  • No late charges.
  • No Default interest.
  • Must report the borrower as current in accordance with the FCRA and other applicable federal guidelines.
  • Suspend reporting delinquencies to the credit agencies during the forbearance period (presumably, this applies if the borrower was already delinquent prior to January 7th, but no Notice of Default was recorded).
  • Cannot initiate foreclosure, go to sale or execute a foreclosure-related eviction judgment.
  • No later than thirty (30) calendar days before expiration of the initial forbearance period, the servicer must provide the borrower with written notice disclosing both of the following:
    • “Any documentation or forms that the mortgage servicer requires the borrower to furnish or complete to be considered for an additional period of forbearance.
    • A description of the deadlines and timelines associated with considering the borrower for an additional period of forbearance.”
  • Following receipt of the initial forbearance request, notify the borrower that the forborne payments must be repaid.
    • Note – the MFA does not seem to require that this notice be provided in writing not does it designate a specific time for providing the notice. Presumably, it can be provided in the servicer’s 5-day response letter to the initial forbearance request.
  • If the borrower was current when entering the forbearance, the servicer cannot require that the forborne payments be repaid in a lump sum.
  • The failure to comply with the MFA shall not affect the validity of a foreclosure sale to a bona fide purchase for value.
  • With respect to a federally backed loan (as defined in the MFA), a person shall not be held liable for a violation of the MFA if compliance with this title conflicts with the servicing guidelines applicable to the federally backed loan.
  • With respect to a residential mortgage loan that is not a federally backed loan, a person shall not be held liable for a violation of this title if compliance with this title conflicts with

the servicing guidelines issued by Fannie Mae or Freddie Mac.

 

When will the MFA be Effective?

Immediately upon being signed by the Governor!

 

As mentioned at the outset, the MFA has not yet been finalized so some of the provisions could still change. However, the final rules should be substantially similar to the current version of the MFA. Hopefully, this summary gives you a head start on designing your internal compliance procedures. Of course, the above summary of the MFA is not intended to be relied upon as legal advice. Please consult with your preferred counsel before taking any action with regards to the content of this article or SB 238.

We will update you when the final bill passes. In the interim, please feel free to reach out with any questions.

Robert Finlay, Esq. is CMA General Counsel and a Partner at Wright, Finlay & Zak, LLP. He can be reached at rfinlay@wrightlegal.net