California Attorney General Rob Bonta. Credit/California Department of Justice
The California Credit Union League asked a federal judge to nullify a state law that regulates so-called “zombie second mortgages,” which are re-emerging to haunt homeowners.
The lawsuit, filed in U.S. District Court in Sacramento earlier this month, challenged a provision in Assembly Bill 130, specifically California Civil Code Section 2924.13, signed into law by Gov. Gavin Newsom in June. Plaintiffs included the California Credit Union League, the California Mortgage Association, the United Trustees Association, two credit unions, and several businesses and individuals.
“The challenged provisions of AB 130 supposedly focused on remedying issues related to a narrow class of abandoned debts known as 'zombie mortgages,'" the lawsuit stated. “However, as enacted, this new California Civil Code section 2924.13 casts a much wider net that drastically reduces, and in many instances eliminates, the enforceability of virtually all loans secured by subordinate liens on residential real property in California.”
A spokesperson for California Attorney General Ron Bonta said the office is reviewing the lawsuit and will respond as appropriate in the court.
The zombie mortgage provision applies to existing and future second mortgages on all residential properties, including 1- to 4-unit homes, apartment buildings (5+ units) and mixed-use properties. This provision also encompassed both consumer and business loans, including home equity lines of credit. The “zombie” term refers to second mortgages that “arise from the dead” after years of inactivity, when homeowners suddenly receive collection notices or foreclosure threats for debts they believed were forgiven, modified or discharged.
Zombie mortgages proliferated following the 2007–08 financial crisis, when home values plunged and millions struggled to pay mortgages. Some second mortgage holders charged off loans as uncollectible, ceased communications and sold the loans to debt buyers, often without notifying borrowers, according to the CFPB. As a result, many borrowers wrongly believed their second mortgages were resolved.
The California Credit Union League and its co-plaintiffs argued that the AB 130 zombie mortgage provision violates multiple state and federal constitutional protections, including the Contract Clause, Due Process clause, Equal Protection clause and the Supremacy Clause.
Under the zombie mortgage provision, a subordinate lien also may become unenforceable if any of the following practices, among others, occurred during the life of the loan. Those practices include no communication with the borrower for three years; failure to send monthly mortgage statements; omission of ownership or servicing transfer notices; and, issuing a tax document to the borrower (such as an IRS Form 1099-C) that suggests the loan has been written off or exonerated.
Before initiating foreclosure, the zombie mortgage provision requires that the current loan servicer must certify under oath that none of these or any other ostensibly unlawful practices has ever occurred.
“Even if those events happened under a previous servicer, the declarant (loan servicer) would not know about such events,” the lawsuit argued.
The lawsuit highlighted one of California’s largest credit unions, identified as Lender 3, which manages more than $5 billion in assets and serves over 200,000 members.
“AB 130 has directly impaired Lender 3’s contracts, deprived it of property, and caused ongoing harm to its business operations,” the lawsuit alleged. “Lender 3 owns and services multiple subordinate loans where it cannot verify whether the prior servicer continuously communicated with the borrower for a period of three years, sent all required ownership and servicing transfer notices, or sent all required monthly statements.”
Read More: California League Credit Union Lawsuit.
Peter Strozniak can be reached at pstrozniak@cutimes.com.
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