As you may recall, California Civil Code section 2923.5 generally requires that a mortgagee, beneficiary, or agent contact the borrower, in person or by telephone, to explore options for the borrower to avoid foreclosure before a notice of default may be filed. The borrowers here refinanced their home loan, and the rights to service such loan were subsequently assigned to the defendant loan servicer in this action. Borrowers defaulted on the loan and the servicer defendant made at least one successful and numerous unsuccessful attempts to contact borrowers as required by Section 2923.5. The borrowers denied that the service made any such attempts. The defendant servicer then recorded a notice of default, and borrowers filed a complaint for injunctive relief to prevent a foreclosure sale, based on the defendant servicer’s alleged failure to comply with Section 2923.5.
The trial court did not address the facts in borrowers’ complaint or amended complaint (which added class allegations and sought injunctive relief for an entire class), concluding that: (1) the action was preempted under HOLA; (2) there is no private right of action under Section 2923.5; and (3) borrowers were required to tender all arrearages to enjoin foreclosure proceedings. This writ proceeding followed. The appellate court reversed on all three of the trial court’s holdings, and also went on to make further rulings regarding the mechanics of Section 2923.5.
More specifically, the Court held that:
(a) there is a private right of action under Section 2923.5, even though the statute is silent on that point. The Court explained that the absence of an express private right of action is not necessarily preclusive of such a right, and in this case the fact that Section 2923.5 requires a specified course of action and confers an individual right, to hold that it does not confer a private right of action would render the statute advisory or “a dead letter;”
(b) to require the borrower to tender the full amount of indebtedness prior to enforcement of the rights conferred by Section 2923.5 would defeat the purpose of the statute, and accordingly no tender is required to bring an action under the section;
(c) Section 2923.5 is not preempted by HOLA, but only so long as the relief granted under the section is limited to just postponement of a foreclosure sale. The Court reviewed a history of preemption cases and concluded that the process of foreclosure has traditionally been a matter of state real property law, and if the OTS wanted to include the process of foreclosure within the preempted category of “loan servicing,” “it would have been explicit;”
(d) Section 2923.5 is very limited in scope and should be narrowly construed, as there is no right under the statute to a loan modification and the “assessment” and “exploration” required by a lender must “necessarily be simple,” (i.e. simply telling a borrower what options are available and referring the borrower to HUD, rather than providing loan counseling services);
(e) The declaration required by Section 2923.5 in the notice of default need not be made under oath and may simply track the language of the statute itself, thus avoiding the problem of the imposition of unnecessary costs beyond the scope of the statute;
(f) Noncompliance with the statute does not cause any cloud on title after an otherwise properly conducted foreclosure sale, as the only remedy provided is a postponement of the foreclosure sale;
(g) As to this particular case, the Court found that lender compliance with Section 2923.5 was a factual issue and accordingly it was remanded for an evidentiary hearing, but the court denied the petition to the extent it sought reinstatement for a claim for money damages, as the limited remedy under the section is postponement of the foreclosure sale. Further, the Court held that it could not certify a class under the facts here, but expressed no opinion as to a scenario where a lender simply “ignored the statute wholesale.”
Ralph T. Wutscher
Kahrl Wutscher LLP
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