Thursday, July 12, 2012

FYI: Cal App Ct Holds CA Civ Code 2923.5 Not Preempted by NBA, Private Right of Action Allowed Under Civ Code 2923.5

The California Court of Appeal, Sixth District, recently held that the National Bank Act did not preempt Section 2923.5, the California requirement to contact borrowers to discuss options to avoid foreclosure prior to recording a notice of default, and that a borrower had a private right of action based on the bank's alleged failure to so communicate with the borrower.
A copy of the opinion is available at:
Plaintiff ("Borrower") defaulted on a home mortgage loan that was secured by a deed of trust.  The deed of trust identified Mortgage Electronic Registration Systems, Inc. ("MERS") as the beneficiary under the trust deed and as nominee for the lender.  The deed of trust further provided that MERS could foreclose and sell the property "if necessary to comply with law or custom."
The successor trustee under the deed of trust served Borrower with a notice of default and recorded a declaration of compliance with California Civil Code Section 2923.5 ("Section 2923.5"), which requires mortgagees to contact borrowers prior to recording a notice of default to discuss alternatives to foreclosure, such as deeds in lieu and short sales.  About a month later, MERS assigned its beneficial interest in the deed of trust to defendant national bank ("Loan Holder").
Borrower filed a law suit, seeking damages and to enjoin the foreclosure.  The complaint included allegations that Loan Holder supposedly refused to respond to Borrower's various communications, and supposedly violated California law by failing to contact Borrower to discuss foreclosure alternatives prior to filing the notice of default.   Borrower also claimed that Loan Holder was not entitled to payment on the debt due to alleged improprieties in the assignment, transfer, and exercise of the power of sale under the trust deed.
Loan Holder demurred, and the trial court sustained the demurrer without leave to amend and dismissed the action with prejudice.  Plaintiff appealed.
The Court of Appeal reversed, ruling in part that (1) the National Bank Act did not preempt Section 2923.5, (2) Borrower had a private right of action under section 2923.5, and (3) Borrower sufficiently pleaded a violation of Section 2923.5.  
As you may recall, Section 2923.5 provides that a mortgagee, trustee, beneficiary, or authorized agent must contact the borrower "in person or by telephone in order to assess the borrower's financial situation and explore options for the borrower to avoid foreclosure" or satisfy due diligence requirements before a notice of default is filed." Cal. Civ. Code §2923.5.
California law also allows a court to postpone a foreclosure sale until such time as the requirements of Section 2923.5 have been met.  See Cal. Civ. Code. §2924g, subdivision (c)(1)(A).
In addition, the National Bank Act "vests national banks . . . with authority to exercise 'all such incidental powers as shall be necessary to carry on the business of banking'" and expressly designates real estate lending as part of the business of banking.  See 12 U.S.C. §§24 (Seventh); 371(a).
Having taken judicial notice of the facts arising from the legal effect of the various loan documents presented by Loan Holder (see Fontenot v. Wells Fargo Bank, N.A., 198 Cal.App.4th 256 (2011)(status of loan owner as the beneficiary under a deed of trust was not reasonably subject to dispute due to the legally operative effect of document)), the Court of Appeal first ruled that MERS had the authority to execute the notice of default and the assignment of the deed of trust, as such acts were "required" and "necessary to comply with law or custom."
Next, finding the reasoning in the prior appellate case of Mabry v. Superior Court persuasive, the Appellate Court ruled that Section 2923.5 confers a private right of action.  See Mabry v. Superior Court, 185 Cal. App. 4th 208 (2010)("in order to have its obvious goal of forcing parties to communicate . . . about a borrower's situation and the options to avoid foreclosure, section 2923.5 necessarily confers an individual right").    The Appellate Court also observed that Section 2923.5 would be meaningless without the enforcement mechanism in Section 2924g allowing postponement of the foreclosure sale until the requirements in Section 2923.5 have been met. 
Turning to Loan Holder's argument that the National Bank Act preempted Section 2923.5 because Section 2923.5 more than incidentally affected a national bank's real estate lending powers insofar as Section 2923.5 "compel[s] loan modifications as a means of avoiding foreclosures . . . , mandates specific disclosures to borrowers, and requires burdensome reviews of borrower financials . . . .[,]" the Appellate Court narrowly ruled that Section 2923.5 only incidentally affected the lending operations of a national bank, because it did not require a lender to modify a loan or take detailed loan application information, and a lender's noncompliance merely results in providing borrowers more time.
In addition, the Appellate Court concluded that a factual dispute existed as to whether Loan Holder in fact complied with Section 2923.5.  Accordingly, in light of its rulings, the Court reversed the lower court's judgment.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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Chicago, Illinois 60602
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