Alston & Bird Consumer Finance Blog

Mortgage Servicing

California Quickly Enacts New Mortgage Servicing Standards That Can Affect Foreclosures

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What Happened?

On June 30, 2025, California Governor Gavin Newsom signed into law, with an immediate effective date, California Assembly Bill 130, a significant housing bill that, notably renders certain mortgage servicer conduct an unlawful practice in connection with subordinate lien mortgage loans, including, among others, not providing the borrower with any communication regarding the loan secured by the mortgage for at least 3 years and  threatening to conduct a nonjudicial foreclosure after providing a form to the borrower indicating that the debt had been written off or discharged.

The legislation appears to be geared toward combatting “zombie mortgages” which are second mortgage debt that homeowners may have believed was discharged or satisfied long ago, only to have it unexpectedly reappear with demands for payment and potential threats of foreclosure years later. These dormant loans are often sold to debt buyers for a small fraction of their value. Borrowers may have received no notices or statements for years, leading them to believe the second mortgage had been forgiven, discharged in bankruptcy, or modified along with their first mortgage.

Why Does It Matter?

Notably, the legislation forbids mortgage servicers from engaging in the following “unlawful practices” while the servicing subordinate lien mortgages:

  • Not providing written communication to the borrower for at least three years
  • Failing to provide a transfer of loan servicing notice as required by the Real Estate Settlement Procedures Act (RESPA) or investor/grantor requirements
  • Failing to provide a transfer of loan ownership notice as required by the Truth-in-Lending Act (TILA) or investor/grantor requirements
  • Conducting or threatening to conduct a foreclosure sale after providing a form indicating the debt had been written off or discharged
  • Conducting or threatening to conduct a foreclosure after the statute of limitations expired
  • Failing to provide a periodic statement as required by TILA or investor/grantor requirements

Failure to comply with these law’s prohibitions could impede or prevent foreclosure of the second lien and expose servicers to liability. For example, borrowers contending that the mortgage servicer engaged in an unlawful practice may seek to enjoin the foreclosure sale until a court renders a final determination of the servicer’s compliance with the new law. Under the new law, it is affirmative defense in a judicial foreclosure proceeding if the court finds the mortgage servicer engaged in any of the unlawful practices enumerated above.  Court may also provide equitable remedies that they deem appropriate, depending on the extent and severity of the mortgage servicer’s violations. However, any failure to comply with the provisions of this section does not affect the validity of a trustee’s sale or a sale in favor of a bona fide purchaser.

What Should I Do?

Servicers of subordinate lien mortgage loans in California must ensure that they are fully compliant with federal and California law applicable to the servicing of loans, such as providing borrowers timely notices required by RESPA and TILA, especially with older vintage subordinate lien loans that have been delinquent or sporadically performing. Subordinate lien debt buyers must also ensure that their servicers comply with these laws before foreclosing on these debts. Additionally, servicers should review their foreclosure procedures to ensure they do not run afoul of California’s new standards.

Georgia Legislation Expands Consumer Financial Protections

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What Happened?

On May 13 and 14, Georgia Governor Brian Kemp signed into law three measures that amend or expand existing consumer financial protections for Georgians, and impact mortgage lending and servicing as follows:

  • HB 240, effectively immediately upon approval on May 13, prohibits unfair and deceptive practices related to mortgage trigger leads.
  • HB 241, effective July 1, clarifies allowable convenience fees applicable to loans made under the Georgia Residential Mortgage Act (“GRMA”) (as well as laws applicable to installment loans, retail installment and home solicitation sales contracts, motor vehicle sales financing contracts, and insurance premium finance companies).
  • HB 15, effective July 1, in addition to certain licensing amendments, amends the GRMA to impose capital, net worth, liquidity and corporate governance obligation on mortgage lenders and servicers. Noteworthy, the measure requires mortgage lenders and brokers to prepare an annual risk assessment delivered to its board of directors and make it available to the regulators upon request.

Why Is It Important?

Taken together, these pieces of legislation signal Georgia’s intent to enhance consumer protections with respect to mortgage lending and servicing.

Trigger Lead Legislation: HB 240 amends the state’s unfair and deceptive trade law, called the Fair Business Practices Act (“FBPA”).  First, the measure specifies that use of a mortgage trigger lead to solicit a consumer who has applied for a loan with a different mortgage lender or broker (as those terms are defined in the GRMA) is considered unfair or deceptive when it (1) fails to clearly state in the solicitation that the solicitor is not affiliated with the mortgage lender or broker the consumer initially applied with; (2) fails to comply with state and federal requirements to make a firm offer of credit to the consumer; (3) uses the information of consumers who have opted out of being contacted; or (4) offers rates, terms, or costs with the knowledge that they will subsequently be changed to the detriment of the consumer.  For purposes of this provision, a “mortgage trigger lead,” in accordance with the federal Fair Credit Reporting Act, is defined as a “consumer report triggered by an inquiry made with a consumer reporting agency in response to an application for credit.” Second, the measure amends the GRMA to include a new paragraph prohibiting mortgage lenders and brokers form engaging in unfair or deceptive practices as outlined in Section 10-1-393.20 of the Georgia Code.

Banking and Finance Laws: HB 15 implements a variety of changes to Georgia’s banking and finance laws. The measure amends requirements for mortgage lenders related to licensing, reporting to the Nationwide Multistate Licensing System and registry, quarterly and annual reporting obligations, and calculating liquidity and net worth. The measure also requires mortgage brokers and lenders to have a board of directors and outlines their responsibilities including designing governance frameworks, monitoring licensee compliance, accurately reporting, conducting internal audits, and establishing risk management programs. The measure creates two new sections of the GRMA of particular  relevance to mortgage lenders and mortgage brokers:

  • Section 7-1-1022 outlines capital, liquidity, and net worth requirements, to be reported in accordance with generally accepted accounting principles. If a licensed mortgage lender is a covered servicer (meaning that it has a servicing portfolio of 2,000 or more residential mortgages serviced or subserviced as reported in its most recent mortgage call report), it must maintain the requisite the capital, liquidity, and net worth outlined in the Federal Housing Finance Agency Eligibility Requirements for Enterprise Single-family Seller/Servicers. All other lenders must maintain a minimum net worth of $100,000 and evidence of $1 million of liquidity (which may include a warehouse line of credit).
  • Section 7-1-1023 mirrors the corporate governance requirements in the Model Capital, Liquidity and Risk Management Framework for non-bank lenders created by the Conference of State Bank Supervisors. Every mortgage lender and broker must establish a board of directors responsible for establishing a written corporate governance framework, monitoring the licensee’s compliance with said framework, reporting regularly, developing internal audit requirements, creating risk management programs and assessments, and conducting formal reviews. The adoption of financial and corporate governance standards for servicers also follows similar legislation in other states (including Connecticut and Maryland, and Iowa) on which we have previously reported.

Convenience Fees: HB 241 revises the general provisions of Georgia contract law to amend requirements for merchants and lenders seeking to utilize convenience fees when processing electronic payments. The measure sets a floor for convenience fees, allowing merchants to charge whichever is greater — $5.00 or the average actual cost (defined as the amount paid by a lender to a third party or the amount incurred by a third party) of a specific type of payment made by electronic means. These provisions apply to banking and financial institutions, as well as lenders of retail installment loans, home solicitation sales contracts, vehicle financing contracts, and insurance premium finance agreements.

What To Do Now?

Licensed mortgage lenders and mortgage brokers should familiarize themselves with the requirements under the newly amended GRMA and FBPA, particularly the prohibitions on deceptive or unfair practices when using mortgage trigger leads or extending credit.

Mortgage lenders and mortgage brokers should also understand the newly updated licensing, reporting, governance, and liquidity requirements to ensure compliance with Georgia’s updated banking and finance regulations.

When utilizing convenience fees, lenders and merchants should verify that such fees do not exceed the maximum amount and should implement the requisite payment processing options. The $5.00 minimum may allow changes in pricing structures for some lenders and merchants.

*We would like to thank Summer Associate Elise Hall for her contribution to this blog post.

VA Announces Wind Down of VASP Program and VA Home Retention Waterfall

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What Happened?

On April 23, 2025, the U.S. Department of Veterans Affairs (VA) issued Circular 26-25-2 (the Circular), which announces that the VA’s Veterans Affairs Servicing Purchase (VASP) program is winding down. As of May 1, 2025, the VA will no longer accept VASP submissions and will rescind the VA Home Retention Waterfall.  New VASP submissions received in VALERI by the deadline will be evaluated against the VASP qualifying criteria “subject to VA’s determination that funds remain available for VASP.”

Why Does it Matter?

VA implemented the VASP program in May 2024 as the final option in the VA Home Retention Waterfall (i.e., Appendix F to VA Servicer Handbook M26-4), to assist borrowers in finding an affordable loss mitigation option given the high-interest rate environment.

The Circular states that, as of May 1, 2025, VA will rescind the VA Home Retention Waterfall and will stop accepting VASP submissions, including new VASP trial payment plans (TPPs). However, VA will allow active TPPs to continue through August 31, 2025, and will purchase successful loans, subject to VA’s determination that funds remain available for VASP.

VASP Wind Down Key Dates and Requirements

The Circular sets forth the following key dates and program parameters with which servicers are required to follow as the VASP program winds down:

  • VA Home Retention Waterfall: Servicers are required to discontinue use of the VA Home Retention Waterfall outlined in Appendix F to VA Servicer Handbook M26-4 (the Handbook), as soon as practicable, but no later than April 30, 2025, at 11:59 p.m. EDT (the Cutoff Date).

 

  • VASP Event Submissions: On May 1, 2025, VA will no longer accept submissions for new VASPs in VALERI. Submissions for new VASPs reported through the Cutoff Date will be evaluated against the VASP qualifying criteria, and if accepted, VA will review for a VASP payment, subject to VA’s determination that funds remain available for VASP.

 

  • TPPs: Veterans are permitted to continue making payments and complete VASP TPPs for any loans with an accepted VASP TPP event reported through the Cutoff Date. VA will not accept resubmissions of failed VASP TPPs after the Cutoff Date.

 

  • VASP TPP Complete Events: Servicers must report the VASP TPP Complete event in VALERI for all completed VASP TPPs. VASP TPP Complete events should be reported when a VASP TPP fails, or the final payment is received. Any active TPP for which the VASP TPP Complete event is not received by the Cutoff Date will be canceled.

 

  • VASP Required Documents: Servicers must upload required VASP documents into VALERI no later than 6 business days after the VASP Payment Process is launched. Beginning May 1, 2025, VA will deny VASP submissions when the servicer does not meet the 6-business day deadline, and VA will not provide servicers with an opportunity to resubmit. Servicers are responsible for monitoring pending submissions to ensure required documents are timely uploaded before the deadline.

 

  • VASP Payment Process: For VASPs that are timely submitted by the Cutoff Date, and have ongoing active TPPs, VA will review pending VASP Payment processes for all successful submissions received through the Cutoff Date, subject to VA’s determination that funds remain available for VASP. However, no VASP payments will be issued after September 30, 2025 at 11:59 p.m. EDT.

Discontinuation of VA Home Retention Waterfall

As noted above, effective May 1, 2025, servicers are required to discontinue use of the VA Home Retention Waterfall and review veterans for all options outlined in Chapter 5 of the Handbook (Chapter 5). Servicers must offer the best loss mitigation option available for the borrower’s individual circumstances. Servicers are not required to follow the review outline in the VA Home Retention Waterfall; however, servicers must keep VA’s preferred order of consideration in mind.

Additionally, the Circular modifies VA’s pre-authorized loan modification requirements in Chapter 5 by removing the minimum 10% principal and interest payment reduction target for the 30- and 40-year loan modifications, effective May 1, 2025.

What Do I Need to Do?

The industry has been preparing for this wind down but, now that it’s here, servicers should take extra caution to ensure that any submissions before the Cutoff Date are error free.  Servicers also should begin reviewing their loss mitigation policies, procedures, systems, and borrower-facing correspondence and make necessary updates in preparation for the discontinuance of VASP and the VA Home Retention Waterfall. Servicers should also consider ways to mitigate risk against a VA determination that funds are unavailable for VASP. Alston & Bird’s Consumer Financial Services Team is actively engaged and monitoring these developments and can assist with any compliance concerns regarding these changes to VA requirements.

Consumer Finance State Roundup

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The latest edition of the Consumer Finance State Roundup highlights recently enacted measures of potential interest from two states:

California:

Effective January 1, California Assembly Bill 3108 addresses mortgage fraud.  Previously, California law defined “mortgage fraud” to include, in connection with a mortgage loan transaction, filing with the county recorder any document that the person knows to contain a deliberate misstatement, misrepresentation, or omission, and with the intent to defraud.

Taking this a step further, the measure prohibits the filing of any document with the recorder of any county that a person knows to contain a material misstatement, misrepresentation, or omission. Further, the measure expressly provides that a mortgage broker or person who originates a loan commits mortgage fraud if, with the intent to defraud, the person takes specified actions relating to instructing or deliberately causing a borrower to sign documents reflecting certain loan terms with knowledge that the borrower intends to use the loan proceeds for other uses. For prosecution purposes, the alleged fraud value must be $950 or more (the threshold for grand theft).

A mortgage lender could unintentionally find itself guilty of mortgage fraud if it simply allows a borrower to use a business purpose loan for consumer purposes or makes a bridge loan that it knows will not be used for a dwelling. California’s Penal Code § 532f(b) makes it mortgage fraud for a mortgage broker or lender to allow mortgage-related documents to be formed and filed when the broker or lender has reason to know that the borrower intends on using the loan for purposes other than for what the loan is intended.

Although intent to defraud is an element to this crime, that element can only be determined through rigorous and time-consuming investigation. If a borrower, for example, uses a business loan for consumer purposes or does not apply the funds from a bridge loan towards a dwelling, the lender will be subject to additional scrutiny unless it can prove that all efforts were made to understand the borrower’s plans for the funds.

The measure also prohibits a person who originates a covered loan from avoiding, or attempting to avoid, the application of the law regulating the provision of covered loans by committing mortgage fraud. A “covered loan” means a consumer loan in which the original principal balance of the loan does not exceed the most current Fannie Mae conforming loan limit for a single-family first mortgage loan.

The measure also amends Section 4973 of the Financial Code, which imposes certain requirements ad restrictions (e.g., the inclusion of a prepayment fee or penalty after the first 36 months) in connection with covered loans and amends Section 532f of the Penal Code (as discussed above) in connection with the prohibition on committing mortgage fraud.

New York:

  • Effective June 11, Assembly Bill 424 amends Section 35 of the Banking Law, which relates to an information pamphlet that residential mortgage lenders must provide to applicants. In place of making a physical pamphlet available to lenders, the amended section requires the Department of Financial Services to notify mortgage bankers of the posting a digital version of the pamphlet on the Department’s website (and when it makes any changes thereto). The measure also amends the pamphlet contents to reflect that a lender may provide an applicant with a good faith estimate (instead of a loan estimate), depending on the type of loan for which the applicant is applying.
  • Effective May 15, Assembly Bill 2056 amends Section 283 of the Real Property Law, which limits the amount of flood insurance that a mortgagee may require a mortgagor to maintain. Under current law, that section provides that the maximum amount of coverage a mortgagee may require is the mortgage’s outstanding principal amount as of January 1 of the year the policy will be in effect. As amended, that section makes the maximum permitted amount of coverage the lesser of the outstanding principal amount or the residential property’s replacement. Additionally, AB2056 slightly alters the printed notice about flood insurance that a mortgagee must deliver to mortgagors, removing language referring to the fact that required coverage would only protect the interest of the lender or creditor in the property.
  • Effective March 21, New York Senate Bill 804 amends data breach notification requirements. Section 899-aa of the General Business Law requires a person or business to notify New York residents whose data is part of a breach, as well as to provide notice to certain governmental entities (including the Department of Financial Services). As amended, that section will require notification to the Department of Financial Services (in the form mandated by N.Y. Comp. Code R. & Regs. tit. 23, § 500.17) only by “covered entities.” A “covered entity” is any person who requires any type of authorization to operate under the Banking Law, Insurance Law, or Financial Services Law, and thus includes a mortgage banker or mortgage servicer.

New York Passes New Removal Procedures for Officers, Directors, Trustees, and Partners of Any Entity Regulated by Department of Financial Services

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What Happened?

On December 21, 2024, New York Governor Kathy Hochul, signed into law, S7532, which repealed the existing section of the Banking Law addressing the removal of officers, directors, and trustees of banking organizations, bank holding companies and foreign banks (“covered individuals”), and enacted a new section providing a clearer process for removing such individuals and expanding the scope of the removal authority to apply to all entities regulated by the New York Department of Financial Services (“the Department”).

Repealed Section:

The former provisions regarding the removal of covered individuals were limited to banking organizations, bank holding companies, and foreign banks.

The Superintendent of the Department (“the Superintendent”) was authorized to bring an action to the Banking Board (“the Board”) to remove an officer, director, or trustee whenever it found that such individual:

  • violated any law or regulation of the Superintendent of financial services, or
  • “continued unauthorized or unsafe practices . . . after having been ordered or warned to discontinue such practices.”

Note that the Banking Board has not existed since the Department of Financial Services was created in 2011.

The Board would then serve notice of the action to the covered individual to appear before the Board to show why they should not be removed from office. A copy of this notice would be sent to each director or trustee of the banking organization and to each person in charge of and each officer of a branch of a foreign banking corporation.

If after a three-fifths vote by the Board members the Board found that the individual committed such violations, an order would be issued to remove the individual from office.

The removal became effective upon service of the order. The order and findings were not made public, and were only disclosed to the removed individual and the directors or trustees of the banking organization involved. Any such removed individual that participated in the management of such banking organization without permission from the Superintendent would be guilty of a misdemeanor.

Newly Enacted Section:

The new provision expands the removal authority of the Superintendent to apply to all entities regulated by the Department (“covered entities”), including: banks, trust companies, limited purpose trust companies, private banks, savings banks, safe deposit companies, savings and loan associations, credit unions, investment companies, bank holding companies, foreign banking corporations, licensed lenders, licensed cashers of checks, budget planners, mortgage bankers, mortgage loan servicers, mortgage brokers, licensed transmitters of money, and student loan servicers.

The Superintendent is authorized to bring an action to remove such individuals whenever it finds reason to believe that they:

  • caused, facilitated, permitted, or participated in any violation by a covered entity of a law or regulation, order issued by the Superintendent or any written agreement between such covered entity or covered individual and the Superintendent;
  • engaged or participated in any unsafe or unsound practice in connection with any covered entity; or
  • engaged or participated in any willful material act or omitted to take any material act that directly contributed to the failure of a covered entity.

The notice and hearing provisions were changed to allow the Superintendent to serve a statement of charges against the covered individual and a notice of an opportunity to appear before the Superintendent to show cause why they should not be removed from office. A copy of such notice must now be sent to the affected covered entity, instead of the directors or trustees of the covered entity and persons in charge of foreign bank branches.

Additionally, the threshold for removal was changed. Instead of being removed by a three-fifths vote of a board that no longer exists, the covered individual may be removed if, after notice and hearing: (1) the Superintendent finds that the covered individual has engaged in the unlawful conduct, or (2) if the individual waives a hearing or fails to appear in person or by authorized representative.

The order of removal is effective upon service to the individual. The order must also be served to any affected covered entity along with the statement of charges. The order remains in effect until amended, replaced, or rescinded by the Superintendent or a court of competent jurisdiction. Such removed individual is prohibited from participating in the “conduct of the affairs” of any covered entity unless they receive written permission from the Superintendent. If the individual violates such prohibition, they are guilty of a misdemeanor.

Furthermore, the Superintendent is now authorized to suspend the covered individual from office for a period of 180 days pending the determination of the charges if the Superintendent has reason to believe that:

  • a covered entity has suffered or will probably suffer financial loss that impacts its ability to operate in a safe and sound manner;
  • the interests of the depositors at a covered entity have been or could be prejudiced; or
  • the covered individual demonstrates willful disregard for the safety and soundness of a covered entity.

The suspension may be extended for additional periods of 180 days if the hearing is not completed within the previous period due to the request of the covered individual.

Why Does it Matter?

Prior to the update, the Superintendent only had the power to remove individual officers, directors, or trustees from office in various bank organizations. The new law expands this removal power to all entities regulated by the Department.

The amended statute creates an additional penalty for individuals who caused, facilitated, permitted, or participated in the violation of the Banking Law in their positions of power of a regulated entity. Such individuals may be removed from their positions and prohibited from participating in the management of any regulated entity, until they receive written permission from the Superintendent. If they violate the prohibition, they are guilty of a misdemeanor, which can be punished by imprisonment for up to 364 days or by a fine set by the Superintendent.

What Do I Need To Do?

Entities regulated by the Department that are now covered under this section should be aware that violations of law by a licensee may also lead to the removal of certain high-level individuals within the organization. If removed, such individuals would also be prohibited from managing any regulated entity until the Superintendent provides written permission to do so. Affected entities and individuals should take care to ensure compliance with the law to avoid these new penalties.