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Law360 (January 11, 2021, 6:11 PM EST )
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| Yakov Wiegmann |
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| Matthew Lee |
The threat of a wave of mortgage-related lawsuits brings into sharper focus the need for lenders and mortgage servicers to comply with an array of consumer protection regulations.
One example is the California Homeowner Bill of Rights.[2] Enacted in the wake of the mortgage crisis that began in 2007, the HBOR seeks to protect homeowners facing foreclosure by enhancing their access to loan modification and other foreclosure prevention options.[3]
Mortgage servicers must, among other things, try to contact borrowers in person or by phone — before starting the foreclosure process — to discuss their financial situation and explore options to avoid foreclosure.[4] Servicers are also prohibited from some forms of dual tracking, or actively pursuing foreclosure while at the same time considering a borrower's completed loan modification application.[5]
Material violations of certain HBOR provisions can expose lenders and servicers to civil liability. A homeowner can sue for injunctive relief prior to a foreclosure sale,[6] and the sale is enjoined until the violation has been corrected and remedied.[7] After a foreclosure sale, a borrower may recover actual economic damages resulting from a material violation of the pre-foreclosure contact requirement, if the violation was not corrected and remedied prior to the recordation of the trustee's deed upon sale.[8]
Most concerning for lenders and servicers, perhaps, is the possibility that HBOR violations might support restitution and injunctive relief under Business & Professions Code Section 17200, California's Unfair Competition Law. The UCL provides a cause of action for unfair, unlawful or fraudulent business practices. A UCL claim borrows violations of other laws and treats them as unlawful practices, offering equitable remedies.[9]
While a statute — such as some provisions of the HBOR — might not itself provide for a private right of action, it can still serve as the basis for a separate UCL claim.[10] A borrower could assert a UCL cause of action using sections of the HBOR to establish the unlawful activity, and pursue injunctive relief and restitution. Even if the borrower fails to meet the requirements for injunctive relief or damages specified in the HBOR itself, he or she may still be able to pursue such remedies with a UCL claim.
Two recent unpublished California Court of Appeal decisions demonstrate the risks of noncompliance with the HBOR — as well as some of the defenses available to lenders and servicers. In Reese v. Select Portfolio Servicing Inc., a homeowner's conservator, Reese, sued a mortgage servicer, SPS, for HBOR and UCL violations after the mortgage servicer initiated foreclosure proceedings.[11]
Reese claimed that SPS violated the HBOR by dual tracking — specifically, recording a notice of sale while Reese's loan modification application was still pending.[12]
The court of appeal reversed the trial court's grant of summary judgment to SPS on both the HBOR and UCL claims. The court found a triable issue of fact as to whether Reese's loan modification application was complete at the time SPS recorded a notice of sale, so as to trigger the prohibition on dual tracking.[13]
As to Reese's UCL claim, the court concluded that because her dual-tracking claim under the HBOR survived summary judgment, that alleged statutory violation could support a claim under the "unlawful" prong of the UCL.[14] The court reached this conclusion despite the fact that the HBOR section prohibiting dual tracking does not itself provide for a private right of action.[15]
What's more, the court rejected SPS's argument that the homeowner's injuries arose not from its alleged HBOR violations, but from the failure to pay the mortgage. The court reasoned that because Reese allegedly hired counsel and filed suit because of how SPS handled her application, these costs represented additional injury sufficient to support the UCL claim.[16]
The HBOR plaintiff was less fortunate in Grant v. Clear Recon Corp., where the California Court of Appeal affirmed an order sustaining defendant's demurrer.[17] This lawsuit foundered on the rocks of pleading requirements, showcasing some of the defenses available to mortgage companies.
Plaintiff Gavin Grant refinanced his home in 2007, and obtained a loan from Bank of America Corp. The loan was secured by a deed of trust. The deed of trust named Bank of America as the lender and beneficiary, and PRLAP Inc. as the trustee.
The loan provided for interest-only payments for 10 years, and an adjustable interest rate after December 2012. Although these loan terms were set out in a document signed by Grant, he asserted that he was unaware of them.
Grant made loan payments for a few years, but allegedly did not understand how they were being applied and why his loan balance was not decreasing. Bank of America allegedly failed to respond to his request for an accounting, ignored his dispute over the loan balance, and refused his requests to review the original promissory note and deed of trust.
In December 2015, defendant Clear Recon took over as trustee. That same day, Clear Recon recorded a notice of default indicating that Grant failed to make installment payments.
Attached to the notice of default was a declaration signed by a Bank of America employee, purporting to show that the bank had "[c]ontacted the borrower to assess the borrower's financial situation and to explore options for the borrower to avoid foreclosure in accordance with California Civil Code [Section] 2923.55(b)(2)" — part of the HBOR.[18]
Grant claimed, however, that this declaration was false: The bank had not reached out to him to explore foreclosure avoidance options.
After receiving the notice of default, Grant applied for a loan modification with Bank of America. He was approved for a trial modification, but did not accept it because the bank "used an exaggerated income ... to determine his eligibility."[19] Because of this, Grant was not adequately considered for other loan modifications or foreclosure alternatives.
The defendants moved forward with the nonjudicial foreclosure process, and Clear Recon recorded notices of trustee's sale in March 2016 and again in November 2016.
In January 2017, Grant filed his lawsuit. He alleged multiple causes of action against Bank of America and Clear Recon, including violation of Civil Code Sections 2923.55 and 2924.17 — parts of the HBOR — as well as unfair and unlawful practices under the UCL.
The court concluded that Grant did not sufficiently plead facts to support his case. Grant's HBOR-based claims failed because the preforeclosure contact requirement of Section 2923.55 applied to the mortgage servicer, Bank of America, but not to the trustee, Clear Recon.
Similarly, the Section 2924.17 requirement that "a mortgage servicer shall ensure that it has reviewed competent and reliable evidence to substantiate the borrower's default and the right to foreclose" did not apply to the trustee.
Clear Recon therefore had no obligation to ensure that Bank of America's declaration attesting to compliance with the preforeclosure contact requirement was accurate.[20] Moreover, any violation of Section 2923.55 had been remedied by the fact that after receiving the notice of default, Grant applied for a loan modification and was approved — albeit on terms he found unacceptable.[21]
Because Grant's UCL claim was premised on the alleged HBOR violations, it failed along with them. The predicate unlawful business practice was missing.[22]
Only the claims against Clear Recon were addressed in the appellate decision. Bank of America had also successfully demurred in the trial court, in part because Grant was offered — and refused — a trial loan modification. This led the judge to conclude that any HBOR violation would not have been material.[23]
Again, Grant's UCL claim against the bank failed along with the HBOR claims that formed its basis.[24]
Legislation like the HBOR — passed during the previous foreclosure crisis to protect homeowners and to provide guidance about the foreclosure process — may come into play during a potential repeat of the foreclosure crisis, brought on this time by the pandemic.
Lenders and mortgage servicers would be well advised take a proactive approach to complying with such laws: Even if the statutes themselves do not provide for a private right of action, they might form the underpinnings of a UCL claim.
Defendants in such cases should carefully scrutinize the pleadings. Plaintiffs' complaints may be vulnerable to challenges based on the type of institution involved — e.g., mortgage servicer, mortgagee, trustee, beneficiary or authorized agent.
The offer of a loan modification may also, in some cases, cure an earlier HBOR violation, although, as Reese shows, courts are willing to provide homeowners redress for incidental damages, even if the bulk of the alleged harm was unrelated to the statutory breach.
Yakov P. Wiegmann is a partner and Matthew E. Lee is an associate at Riley Safer Holmes & Cancila LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Diana Olick, Covid-19 mortgage bailouts decline slightly, but a new foreclosure crisis could be brewing (Sept. 11, 2020), https://www.cnbc.com/2020/09/11/coronavirus-mortgage-bailouts-decline-but-new-foreclosure-crisis-could-be-coming.html.
[2] California Homeowner Bill of Rights (Dec. 14, 2020), https://oag.ca.gov/hbor.
[3] Id.; Lucioni v. Bank of Am., N.A.
, 3 Cal. App. 5th 150, 157 (2016).[4] Lucioni, 3 Cal. App. 5th at 150; see also Cal. Civ. Code §§ 2923.55, 2924.9.
[5] Cal. Civ. Code § 2923.6.
[6] Cal. Civ. Code § 2924.12(a)(1); Lucioni, 3 Cal. App. 5th at 158.
[7] Cal. Civ. Code § 2924.12(a)(2).
[8] Cal. Civ. Code § 2924.12(b).
[9] Rose v. Bank of Am.
, N.A., 57 Cal. 4th 390, 396 (2013).[10] Id.
[11] No. A155500, 2020 WL 5511540, at *1 (Cal. Ct. App. Sept. 14, 2020) (unpublished opinion).
[12] Id. at *2-*3.
[13] Id. at *5.
[14] Id. at *7.
[15] See Cal. Civ. Code § 2923.6.
[16] Reese, 2020 WL 5511540 at *7; see also Cal. Civ. Code § 2923.6.
[17] No. G057851, 2020 WL 5494644, at *1 (Cal. Ct. App. Sept. 11, 2020), reh'g denied (Oct. 6, 2020) (unpublished opinion).
[18] Id. at *1.
[19] Id. at *2.
[20] Id. at *5.
[21] Id.
[22] Id. at *7.
[23] Notice of Ruling at Hr'g on Dem. to Second Amended Compl., Ex. A, at 4, Apr. 26, 2019.
[24] Notice of Ruling at Hr'g on Dem. to Second Amended Compl., Ex. A, at 5, Apr. 26, 2019.
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