California Bill Would Require Mortgage, Auto and PACE Forbearances and Restrict Payday Lending

COVID-19 Update

Through an amendment to Assembly Bill 2501, California Assembly Banking and Finance Chair Monique Limon has introduced sweeping forbearance legislation that would impact single-family and multifamily mortgages, auto-secured financing, Property Assessed Clean Energy (PACE) financing, and payday loans. Named the COVID-19 Homeowner, Tenant, and Consumer Relief Law of 2020, the bill provides for mandatory long-term forbearances; prohibitions on foreclosures, evictions and repossessions; and mandatory payment plans and fee restrictions on payday loans. The bill would take immediate effect and continue in force until 180 days after the Governor declares that the emergency related to COVID-19 has ended.

Specific Restrictions

With respect to residential mortgage loans, the bill would prohibit mortgagees, mortgage servicers and similar parties from commencing or prosecuting any judicial foreclosure action or recording a Notice of Default, and from taking any steps to evict tenants following a foreclosure. It would stay judicial and nonjudicial foreclosure proceedings and time limits and require a 180-day forbearance requested by borrowers experiencing a financial hardship. Borrowers who are 60 days or more delinquent on a mortgage obligation would automatically be granted a 180-day forbearance. No fees, penalties or additional interest could be assessed, accrued or applied to a borrower’s account during the forbearance period. The bill also provides for possible extensions of the forbearance period and various types of mandatory notices and loan modification options.

With respect to multifamily mortgage loans, servicers would be required to provide forbearances of 180 days, with a 180-day extension at the borrower’s option. Borrowers taking forbearances would be required to provide rent relief to their tenants and not evict them or charge fees or penalties for nonpayment of rent.

With respect to vehicle-secured credit obligations, servicers would be prohibited from repossessing mobile homes or motor vehicles during the COVID-19 emergency and for the 180-day period following the emergency. This would include a verbal or written notice of intent to repossess. Servicers also would have to provide mandatory forbearances for 90 days, with a 90-day extension at the borrower’s option. Servicers could not impose fees, penalties or additional interest beyond the amounts scheduled or calculated as if the borrower made proper payment. Servicers also would be required to offer modifications before the conclusion of the forbearance period, and there would be limits on deficiency judgments after the COVID-19 emergency ends.

With respect to the PACE Program, program administrators would be required to notify property owners within 60 days of enactment that they are entitled to forbearance on the next annual PACE assessment if facing a financial hardship due to the COVID-19 emergency. The property owner may be required to pay the deferred PACE assessment in the year following the scheduled end of the assessment contract. Program administrators could not charge additional fees or interest related to the forborne PACE assessment or exercise any contractual acceleration rights.

With respect to deferred deposit transactions (payday loans), the bill goes beyond COVID-19 relief. Permitted fees would be limited to 5 percent of the face amount of the check, a third of what is permitted currently. Licensees would be required to offer customers payment plans on existing transactions, wherein the customer has 60 days to pay in four equal installments; no additional fees or charges are permitted. The bill also would prohibit licensees from allowing customers to enter into a deferred deposit transaction within 14 days of a previous transaction being repaid, and it would prohibit NSF fees in deferred deposit transactions.

How Would These Rules Be Enforced?

A violation of any provision of AB 2501 would be deemed an unfair and deceptive business practice pursuant to Section 17200 of the Business and Professions Code, which provides for a private right of action with a limited remedy. Additionally, mortgage servicers found to have violated any of the proposed requirements would be deemed to be in violation of their licensing statute and would forfeit any foreclosure rights against the affected borrower unless they cure the violation and reinstate these rights.

What Happens Next?

The bill will be heard by the Assembly Banking and Finance Committee on May 19. While the bill will likely be amended as it works its way through the legislature, the main theme will remain the same: Financial services companies offering mortgages, vehicle-secured loans, PACE Program loans and deferred deposit transactions could be required to provide some amount of forbearance to Californians experiencing hardship during this pandemic. If the bill becomes law, the effect would be widespread. Not only would financial institutions lose the ability to work out forbearance directly with their customers based on their own individualized circumstances, but there also could be a reduction in the level of credit made available for Californians during the emergency and for 180 days thereafter.

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