Second Regular Session Sixty-eighth General Assembly STATE OF COLORADO INTRODUCED LLS NO. 12-0570.01 Duane Gall x4335 SENATE BILL 12-071 SENATE SPONSORSHIP Giron, HOUSE SPONSORSHIP Duran, Senate Committees House Committees Judiciary A BILL FOR AN ACT Concerning a requirement to pursue available loan modification remedies before foreclosing on residential real property. Bill Summary (Note: This summary applies to this bill as introduced and does not reflect any amendments that may be subsequently adopted. If this bill passes third reading in the house of introduction, a bill summary that applies to the reengrossed version of this bill will be available at http://www.leg.state.co.us/billsummaries.) The bill requires the holder of an evidence of debt (typically a mortgage lender), before initiating or completing the process of foreclosing on residential real property containing 4 or fewer dwelling units, to make and fully document its efforts to: Contact the borrower directly; Negotiate in good faith with the borrower in an effort to effectuate a cure for default rather than move directly into the foreclosure process; Fully assess the eligibility of the borrower, the property, and the loan for any available public or private loan modification programs or other alternatives to foreclosure; Communicate with, and inform, the borrower about impending deadlines and the consequences of missing them at every major step of the foreclosure process; Carry the burden of proof in court proceedings regarding the holder's compliance with procedural as well as substantive requirements before obtaining an order authorizing sale of the property under rule 120 in the Colorado rules of civil procedure; and Abide by the terms of any offer of modification it makes, if the borrower signs and returns documents containing those terms. Be it enacted by the General Assembly of the State of Colorado: SECTION 1. In Colorado Revised Statutes, add part 10 to article 38 of title 38 as follows: PART 10 LOAN MODIFICATION PRIOR TO FORECLOSURE 38-38-1001. Definitions. As used in this part 10, unless the context otherwise requires: (1) "Cash for keys" means an investor program through which a holder offers monetary relocation assistance to the borrower. (2) "FHA" means the federal housing administration. (3) "Foreclosure activity" means any action by a holder in which the holder attempts to exercise the power-of-sale clause found in a mortgage note or security instrument associated with the property securing an obligation. The term includes referring a loan to foreclosure, issuing a notice of election and demand, participating in a hearing pursuant to C.R.C.P. 120, and conducting a foreclosure sale. (4) "Foreclosure alternative" means any program designed to avoid foreclosure, including: (a) A loan modification offered under the making home affordable program; (b) A non-MHA loan modification offered by the holder; (c) A refinance under HAMP or other non-HAMP refinance program offered by the holder; and (d) Any forbearance, repayment plan, short sale, or deed in lieu of foreclosure in connection with any of which the holder is required to work with FHA programs allowing for partial claims as well as mortgage insurers in an attempt to cure or reduce the delinquency of a defaulted loan. (5) "HAMP" means the home affordable modification program established by the making home affordable program. (6) "Holder" has the same meaning as "holder of an evidence of debt" as defined in section 38-38-100.3 (10). (7) "Holder certification" means the certificate and supporting documentation that a holder must present to the attorney representing the holder in connection with a foreclosure before the attorney issues a notice of election and demand and before the attorney proceeds with a hearing pursuant to C.R.C.P. 120. Each holder certification attests to the fact that the holder has complied with all the provisions of this part 10 required to be completed before proceeding with the foreclosure step to which the certification pertains. (8) "MHA" means the making home affordable program implemented by the United States department of the treasury pursuant to its authority under the troubled asset relief program, established in Title I of the "Emergency Economic Stabilization Act of 2008", Pub.L. 110-343, codified at 12 U.S.C. sec. 5211 et seq. (9) "NPV" means the net present value evaluation of a mortgage. (10) "Partial claim" means a monetary contribution, whether in the form of a loan or grant, from a mortgage insurer or other party guarantying the loan that is used to cure or reduce delinquency. (11) "Presale certification" means the certificate that a holder must present to the foreclosing attorney and public trustee attesting to the fact that it has met all statutory requirements contained in this part 10 and is authorized to proceed with the scheduled foreclosure sale. (12) "Reasonable efforts", with regard to making right-party contact, means efforts complying with the minimum standards set forth in section 38-38-1005. (13) "Right-party contact" means making contact, either via written or oral communication, with a borrower or co-borrower on the loan as to which the holder is considering or pursuing foreclosure. 38-38-1002. Scope of part - actions required - conditions precedent to foreclosure. (1) This part 10 does not create a substantive right to a loan modification. (2) This part 10 applies to all owner-occupied residential real property containing no more than four dwelling units and that secures an obligation as to which a mortgage note and deed of trust were executed, and the deed of trust recorded, after January 1, 2001. (3) A holder shall not commence foreclosure activity, and if foreclosure activity has commenced, the holder shall immediately cease and desist from pursuing any further foreclosure activity, until: (a) (I) The holder has made right-party contact, or made reasonable efforts to make right-party contact and, if right-party contact is made and the property meets the criteria of subsection (2) of this section, worked with the borrower to place the borrower in a foreclosure alternative program; or (II) All reviews for foreclosure alternatives under government programs and all programs offered by an investor have been exhausted and it has become objectively demonstrable that foreclosure is the only practicable means of protecting the holder's interests; (b) The holder has notified the borrower regarding possible foreclosure alternative options as specified in section 38-38-1004; (c) The holder has provided a certification to the foreclosure attorney, as specified in section 38-38-1007, before issuing a notice of election and demand and before the hearing pursuant to C.R.C.P. 120; (d) The holder has provided a presale certificate to the foreclosure attorney in accordance with section 38-38-1008; and (e) The holder has worked in good faith with all parties designated by the borrower as authorized third parties on the loan. If the third party is an attorney representing the borrower in the mortgage matter, the holder shall treat the attorney as a borrower and shall include the attorney on all communications with the borrower. Upon a borrower's request, a holder shall communicate only with the borrower's attorney, unless otherwise required by law, in which case the holder shall copy the attorney on all borrower communications. 38-38-1003. General borrower notification from state agency. (1) The department of local affairs shall create a foreclosure avoidance notice, written in English, using at least twelve-point type, in accordance with subsection (2) of this section. The holder shall send a copy of the notification to the borrower at least thirty days before the borrower's account is referred for foreclosure. A copy of the notification must also be posted on the Colorado foreclosure hotline's web site and on the page on each county's public trustee web site that contains information or answers to frequently asked questions regarding the foreclosure process. (2) The notification shall be in substantially the following form: THIS IS NOT A SOLICITATION FROM THE SERVICER OF YOUR MORTGAGE. THE STATE OF COLORADO HAS ISSUED THIS NOTICE TO ADVISE YOU OF OPTIONS THAT MAY HELP YOU AVOID FORECLOSURE. THIS NOTIFICATION IS ISSUED BY A STATE ENTITY THAT IS NOT AFFILIATED WITH YOUR MORTGAGE SERVICER. Colorado law requires that you receive this notice of your legal rights before the foreclosure process begins. Colorado law requires every mortgage servicer to make a good-faith effort to pursue foreclosure alternatives with the borrower before foreclosing on the borrower's home. If you are having trouble paying your mortgage, you should immediately contact the loan servicer to discuss your options for avoiding foreclosure. The loan servicer is the company listed on the monthly payment stub or other notice that you get when a mortgage payment is due. You may also call the Colorado foreclosure hotline, an entity created specifically to provide borrowers with free mortgage advice. Potential foreclosure alternatives may include programs such as a loan modification. The loan servicer may participate in the federal loan modification program called the home affordable modification program (HAMP). To find out if your loan servicer participates in HAMP, or to find out more about HAMP, visit www.makinghomeaffordable.gov/programs/lower -payments/pages/hamp.aspx. Although HAMP expires on December 31, 2012, many servicers offer similar loan modification programs of their own. Not all servicers offer such programs and not all borrowers may apply or qualify for these programs. However, a borrower may qualify for other options, such as refinancing, a repayment plan, a short sale, or deed in lieu of foreclosure. With this notification, you should also have received a letter from the loan servicer that describes any available options for avoiding foreclosure. If a borrower wants to apply for any of these options, the borrower must contact his or her loan servicer immediately and submit the required documentation. If you contact the loan servicer and indicate that you want to apply for any of these options, the loan servicer is required to give you at least forty-five days after your receive this notice to apply before it continues with foreclosure activities. You must submit any requested documents by the deadlines indicated in correspondence from a loan servicer to avoid disqualification from foreclosure alternatives assistance. If you submit all of the required documentation and information by the specified deadlines, the loan servicer must review the application and inform you of its decision before initiating the foreclosure process or proceeding with a previously scheduled foreclosure sale. If the loan servicer denies your request for a loan modification, it must send you a detailed denial letter that provides the following information: (a) The exact reason for the denial and, if the denial was based on numerical values such as income and expense calculations, the numbers used; (b) Instructions on how to dispute the denial; and (c) A toll-free telephone number to call with questions or disputes and the hours of operation during which a live representative can be reached. If you decide not to apply for foreclosure alternatives assistance or do not meet the deadlines outlined by the loan servicer, the loan servicer may proceed with foreclosure activities. If you change your mind and decide to seek foreclosure alternatives assistance in the future, you must contact the loan servicer immediately, but there is no guarantee that the loan servicer will be able to provide you with any assistance at that time. 38-38-1004. Communication requirements. (1) In connection with every foreclosure, a loan servicer shall send the borrower notices, written in plain language, about all foreclosure alternatives assistance and the pendency of foreclosure proceedings. The notices must be sent to the borrower with the right to cure letter, the notice of election and demand, and the documents required under C.R.C.P. 120. All notices must include at least the following information: (a) A toll-free telephone number where the borrower can reach a representative of the loan servicer who is capable of providing specific details about foreclosure alternatives assistance and the application process, together with the hours of operation during which calls will be answered by a living person; (b) A list and description of the programs that may be available to the owner; (c) The importance of responding to the foreclosure alternatives assistance notice and the benefits of each type of assistance; (d) The process to apply for the programs and what the borrower should expect throughout the process; and (e) Instructions on how to complete a foreclosure alternatives application, which must be included with the communication. (2) A final notification and foreclosure alternatives application packet must be included with the notice of sale. This notification packet must contain the same information as the other notifications but will also contain a statement indicating that it is the borrower's final opportunity to contact the servicer for foreclosure alternatives assistance. This notification packet must also state that the included foreclosure alternatives application must be received no later than 12 midnight on the seventh business day preceding the scheduled foreclosure sale. (3) A loan may not be referred to foreclosure until one of the following occurs: (a) The borrower clearly indicates that he or she does not wish to pursue foreclosure alternatives, and the servicer thoroughly documents this fact in its records; (b) The holder sends the borrower the foreclosure alternatives application packet as required under this section and the borrower does not submit the requested documents by the deadlines stated in the foreclosure alternatives application packet; (c) The borrower submits an initial foreclosure alternatives application packet, the holder reviews it for all foreclosure alternatives, and based on that review the holder determines that the borrower is ineligible for assistance and notifies the borrower of the reasons for the determination; (d) The borrower is approved for one or more foreclosure alternatives but is subsequently removed from the program for failing to perform the necessary actions to remain eligible; or (e) The holder has undertaken reasonable efforts to make right-party contact but is not able to do so and has clearly documented the time and methods of each attempted contact. 38-38-1005. Borrower solicitation. (1) A holder shall not refer a loan to foreclosure until the following requirements for borrower solicitation as outlined in this section have been satisfied: (a) A loan servicer shall begin to solicit the borrower for foreclosure alternatives assistance either upon a borrower's request or when two payments are past due, and before initiating foreclosure proceedings. This solicitation must continue until a right-party contact is made or the holder has made a reasonable effort, as defined in paragraph (b) of this subsection (1), to solicit a right-party contact. (b) The holder shall make a reasonable effort to solicit a borrower appearing on the note. The holder is deemed to have made a reasonable effort when all of the following have occurred within a period of at least thirty days: (I) The holder, or a loan servicer acting on the holder's behalf, made a minimum of four telephone calls to the last-known phone numbers of record, at intervals no less than five days apart and at different times of the day; (II) The holder, or a loan servicer acting on the holder's behalf, sent two written notices to the last-known address of record by sending one letter via certified or express mail or via overnight delivery service with a return receipt or a delivery confirmation and one letter via regular mail; and (III) If the borrower is represented by an attorney, the holder, or a loan servicer acting on the holder's behalf, has made the same efforts described in subparagraphs (I) and (II) of this paragraph (b) to contact the representing attorney. (2) All borrower solicitation, whether oral or written, must include the same information as contained in borrower notices as described in section 38-38-1004 (1). (3) A holder shall send a foreclosure alternatives application packet to the borrower within ten days after the first right-party contact. The packet must clearly indicate the deadline by which the requested documents must be returned. That deadline must be no less than fifteen days after the first right-party contact. If the borrower does not return the foreclosure alternatives application by the deadline, the holder shall resend the packet along with a letter that clearly states that the borrower will be removed from consideration for foreclosure alternatives options if the packet is not returned within fifteen days after the initial due date. 38-38-1006. Foreclosure prevention measures. (1) If a borrower submits a complete foreclosure alternatives application packet by 12 midnight of the seventh business day before the foreclosure sale, the holder shall review the borrower for foreclosure alternatives. (2) (a) (I) Within ten days after receiving the initial foreclosure alternatives application packet, the holder shall notify the borrower of its receipt and indicate whether any additional documentation is needed. If additional documentation is needed, the holder shall notify the borrower in writing which documents are needed and state a date by which the documents must be submitted. That date must be no less than fifteen days after the date of the letter. (II) If the borrower does not respond by the due date specified in the missing information request, the holder shall resend the letter via certified mail, return receipt requested. The letter must restate which documents are needed and provide a due date for receipt of the documents, which must be no less than fifteen days after the date of the letter. The letter must also include a clear and conspicuous statement that if the borrower does not provide the documentation by the stated due date, he or she may be denied foreclosure alternatives assistance and foreclosure proceedings will continue. (b) Within thirty days after receiving a complete foreclosure alternatives application packet, the holder shall notify the borrower of the status of the foreclosure alternatives review. (3) A holder shall cease all foreclosure activities until the borrower has been reviewed under all available programs. If the borrower is determined to be ineligible for all foreclosure alternatives, the holder shall send to the borrower, via certified mail, a detailed denial notification as required by section 38-38-1007 (2). (4) (a) The borrower may dispute the outcome of the holder's foreclosure alternatives review if information provided by the holder is not accurate or if the holder has failed to comply with any requirement of this part 10 or any other applicable law or regulation pertaining to foreclosures. The borrower shall notify the holder of the dispute within thirty days after the denial. (b) If a borrower believes that an unfavorable resolution of the dispute was issued because the holder used inaccurate numerical calculations or the borrower was denied due to a holder's assertion that it was missing documentation or the borrower failed to meet a document submission deadline, the borrower has the right to request a subsequent meeting with the holder, a mediator, or both to assess the validity of the holder's dispute resolution. The meeting must occur within fifteen days after the borrower's receipt of the holder's notice of the dispute resolution and may be held telephonically if all parties are in possession of all relevant documents. If the borrower requests the intervention of a mediator, each party is responsible for half of the mediator's fee. (c) The holder shall acknowledge receipt of the borrower's notice of the dispute within five business days and shall complete its review of the matters in dispute within thirty days. When the review is complete, the holder shall notify the borrower of the outcome of the review and provide a detailed letter explaining how the dispute was reviewed and how the decision was made. (5) The holder may resume foreclosure proceedings the day after it is notified that the borrower received the denial letter unless such actions violate subsection (6) of this section. (6) (a) A foreclosure sale may not be held sooner than thirty days after the date of the denial notice. If, during that thirty-day period, the borrower disputes the denial, the sale must be postponed until thirty days after the holder notifies the borrower of the results of the review of the denial and the holder provides to the foreclosure attorney and the public trustee the presale certification as required by section 38-38-1008. (b) The holder shall not place a bid until the presale certification has been provided to the public trustee. If the public trustee does not receive the presale certification before 12 noon on the second business day before the scheduled sale date, then the trustee shall postpone the sale, one week at a time, until the certification is received and all other bid requirements, as set forth in section 38-38-106, are met. 38-38-1007. Content of holder certification. (1) HAMP will be discontinued on December 31, 2012, and the content for denial notices will be limited. (2) Before filing the notice of election and demand, and as part of its application for an order authorizing sale under C.R.C.P. 120, the holder shall certify the actions it has taken to engage the owner in foreclosure alternatives activities, the details of all reviews performed under each foreclosure alternatives program, and a detailed explanation of the result of each review. The certification must contain at least the following information: (a) If no right-party contact was made: (I) A declaration specifying the dates, times, and methods by which the holder attempted to contact the borrower; (II) The outcome of those attempts; and (III) The date on which the file was closed and notification was sent to the borrower; (b) If right-party contact was made, the status of any ongoing foreclosure alternatives review or, if the loan is not under active foreclosure alternatives review, a detailed explanation as to why it is not being reviewed. Even if the loan was previously reviewed and was denied for all foreclosure alternatives options, the holder shall file the certification required by this section. (c) If the holder has determined that the borrower is ineligible for all foreclosure alternatives programs, the holder shall provide a detailed denial notice containing a list of all programs under which the borrower was reviewed and providing specific details regarding the reasons for denial. The allowable reasons for denial and the details required under each are: (I) The property or loan is ineligible: (A) The reason that the property or loan is ineligible; and (B) The process and data used in determining ineligibility; (II) The property is not owner-occupied: (A) The method used to determine the occupancy status; (B) The date the determination was made; and (C) If the determination was made based on information from a credit reporting agency, the dates and methods that the holder used to reconcile any discrepancy between the credit report from the credit reporting agency and other information indicating that the property was owner-occupied; (III) The current payment is already below the allowable ratio of mortgage payment to gross income: (A) Data used in calculating gross income; and (B) Data used to determine the current monthly payment; (IV) The offer was not accepted or the request was withdrawn by the borrower: (A) The indications or evidence that the offer was not accepted or the request was withdrawn by the borrower; (B) The date such determination was made; (C) An account of all dates on which the holder attempted to or did contact the borrower before the determination date, including the method and details of the communications; and (D) Whether the borrower contacted the holder after the determination date to contest the denial; (V) The loan was previously modified: (A) The date that the loan was modified; (B) The terms of the modification; and (C) When the previous modification was cancelled and why; (VI) The borrower did not submit all necessary documents by applicable deadlines: (A) The documents that are alleged to be missing; (B) All dates on which the holder received documents submitted by the borrower and the content of those submissions; (C) The dates on which the holder sent letters advising the borrower of the missing documents and the deadlines listed in the letter by which the borrower was required to return the missing documents; and (D) The dates and contents of all communications initiated by the borrower before and after the denial; (VII) An affordable payment cannot be reached under applicable guidelines: (A) Data used to determine gross income; (B) Data used to calculate the modified principal and interest payment; (C) Data used to calculate the taxes and insurance; (D) The steps taken and the data used while attempting to meet any applicable loan-to-income threshold for loan modification; and (E) Whether there was an excessive forbearance and if so, the dollar amount allowed to be forborne and the forbearance amount on the loan that would be necessary to achieve an affordable payment; (VIII) The investor or guarantor is not participating in foreclosure alternatives programs: (A) The name of the investor or guarantor; (B) The approximate date on which the holder approached the investor or guarantor in a good-faith effort to persuade the investor or guarantor to consider foreclosure alternatives; (C) Whether the loan has private mortgage insurance that prohibited the modification; and (D) Whether the loan is guaranteed by an entity and, if so, whether that entity denied the modification; (IX) Modification was not approved by the court or trustee in a bankruptcy proceeding: (A) The guideline that the holder is depending on to allow a modification to be denied based on the filing of bankruptcy; (B) The date that the holder determined the borrower was ineligible; and (C) Any reason other than the act of filing bankruptcy that the holder used in denying the modification; (X) A negative NPV analysis under the applicable investor guidelines: (A) The data set forth in subsection (3) of this section; and (B) The investor's forecasted loss or gain based on the NPV analysis; (XI) The borrower was denied conversion from a trial period plan (TPP) to a permanent modification because TPP was not fulfilled: (A) How the borrower violated the provisions of the TPP; (B) If the alleged violation is due to missed payments, then the payment due dates and amounts; and (C) The dates and amounts of payments received by the holder; (XII) Investor guidelines prevent eligibility for modification: (A) The reason the borrower was deemed ineligible for the modification; (B) A description of the investor guidelines or restrictions on which the determination was based; (C) Date of the denial; and (D) Data used in determining that the borrower was ineligible for a modification, including income and expense data. (d) If the holder has determined that the borrower is not eligible for foreclosure alternatives other than modification, the holder shall provide a notice detailing: (I) The data used in calculating affordability for each alternative; (II) The reason the borrower was denied for short sale or deed in lieu of the foreclosure; (III) The date the holder received a short sale offer on the property; (IV) The offer amount; (V) The lowest offer the investor would accept for a short sale; or (VI) Whether the borrower is eligible for cash for keys and, if not, an explanation of why not. (3) If the denial was based on negative NPV under the applicable investor's program guidelines, data must be input into the following fields, with supplemental information where necessary to determine how the data were derived: (a) Current borrower credit score; (b) Current co-borrower credit score, where applicable; (c) Monthly gross income. If there are multiple sources of income used in the calculation, then the monthly gross income figure used for each source of income shall be provided separate from one another. (d) State and zip code in which the property is located; (e) Property value; (f) Property valuation type; (g) Date the data were collected; (h) Investor code; (i) Unpaid principal balance at origination; (j) First payment date at origination of the loan; (k) Mortgage product type; (l) Adjustable-rate mortgage reset date, where applicable; (m) Next adjustable-rate mortgage reset date; (n) Unpaid principal balance before modification; (o) Interest rate before modification; (p) Remaining months left on loan; (q) Principal and interest payment on loan before modification; (r) Monthly real estate taxes; (s) Monthly hazard and flood insurance; (t) Home owners' association fees; (u) Number of months the loan is delinquent; (v) Whether the loan is in imminent default; (w) Mortgage insurance coverage percent; (x) NPV analysis date; (y) New principal balance after the proposed modification; (z) Interest rate after the proposed modification; (aa) Amortization term of the proposed modification; (bb) Principal and interest payment of the proposed modification; (cc) Principal forbearance amount of the proposed modification; (dd) Principal forgiveness amount of the proposed modification, where applicable; (ee) Modification fees; and (ff) Mortgage insurance partial claim amount of the proposed modification, where applicable. (4) (a) Documentation supporting the declarations in the holder's certification must be provided to the holder's attorney before recordation of the notice of election and demand and the hearing pursuant to C.R.C.P. 120. The documentation must include a screen shot or printout of the holder's electronic records showing full details of all attempts to contact the borrower and the content of those communications, the dates and content of all written communications sent to or received from the borrower, and any information used in evaluating the borrower for foreclosure alternatives. (b) The foreclosing attorney shall record the documents specified in paragraph (a) of this subsection (4) with the notice of election and demand and include them in any notification sent to the borrower or any party representing the borrower, and shall include the certification and documents with the papers submitted to the court for the hearing pursuant to C.R.C.P. 120. (5) Any party may contest the truth and sufficiency of the holder's certification required under this section, filed with the notice of election and demand under section 38-38-101 (1) or accompanying the documents required by C.R.C.P. 120, and the court may refrain from entering the order authorizing sale until the holder certifies that it has complied with all requirements of this part 10. (6) If the holder participates in the federal MHA program and the loan under review meets the requirements to be eligible for review as specified in the MHA guidelines, the holder must abide by all the requirements found in the applicable MHA guidelines. Failure to do so constitutes a violation of this part 10, precludes the holder from obtaining the certifications required by this section and section 38-38-1008, and voids any such certification that was already provided. 38-38-1008. Content of presale certification. (1) No sooner than seven business days before the scheduled foreclosure sale, the holder shall provide to the foreclosure attorney a written certification that contains a statement certifying that one of the circumstances in section 38-38-1002 (3) (a) has occurred, all other available foreclosure alternatives have been exhausted, and a non-foreclosure outcome could not be reached. (2) The truth and sufficiency of the presale certification required under this section may be challenged and enforced in accordance with section 38-38-1006 (4) (a). 38-38-1009. Execution of foreclosure alternatives modification documents. (1) Except as otherwise provided in subsection (2) of this section, a modification document that has been received by the borrower constitutes an offer to contract and is considered a binding contract immediately upon the borrower's acceptance, which has occurred once the borrower signs the modification document and takes action to return the signed document to the holder. (2) The modification is not binding if the holder withdraws the offer before the borrower executes the documents and returns them by the method requested by the holder. SECTION 2. Effective date - applicability. This act takes effect upon passage and applies to foreclosures in which the notice of election and demand is filed on or after said date. SECTION 3. Safety clause. The general assembly hereby finds, determines, and declares that this act is necessary for the immediate preservation of the public peace, health, and safety.