Navigating the Loan Assumption/Loan Modification Process After the Death of a Borrower in California

In 2013 California enacted what is termed the Homeowners’ Bill of Rights (“HOBR”) to assist both loan servicers and homeowners in navigating the process of loan modifications or other foreclosure alternatives when a loan is in default.   But what about when the homeowner dies and there is a mortgage in default?  Does the non-borrower have a right to assume the loan?  To obtain a loan modification? In the last year, I personally dealt with the issue in several cases.  When the first case came through my former office it was an issue that we had not handled before.   When I first looked at the case, it seemed that the non-borrower’s case was without merit and our client was handling the issue correctly.   After a little research, I learned that there was little guidance on how to deal with assumptions and loan modification after the death of the borrower.   That is going to change.  An amendment adding a new code section to the California Civil Code that explains what a loan servicer has to do (and cannot do) when notified of the death of the homeowner was approved on September 29, 2016, by the Governor.    SB 1150 (Civil Code Section 2920.7) prohibits the recording of a Notice of Default once the loan servicer receives notification that a borrower has passed away and until after the loan servicer requests reasonable documentation showing the death of the borrower and demonstrating the that successor has the ownership interest in the property.   More importantly the statute enumerates specific documents to be provided by the successor to show that he or she owns the property as a result of the death of the homeowner.   This is HUGE because that is, in my experience, where loan servicers run into problems because they would demand documents that were not necessary.  For instance, a servicer would demand a Court Order even though the surviving spouse provided an Affidavit of Death of Joint Tenant, which in California is all that is needed to transfer the interest when property is held as joint tenants with a right of survivorship.  To prevent abuse of the statute, the statute only applies to first lien position deeds of trust and to owner occupied property and does not apply if the successor in interest is engaged in a legal dispute over the property and has filed legal proceedings.  I am certain, as with all of the other provisions of the HOBR,  there will be more battles fought related  to the handling of successor in interests’ requests to assume loans and requests for loan modifications.  This new statute will give attorneys more guidance in advising their clients on whether the claims have merit as well as assist in the defense of any claims that are brought on this basis.