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Calif. App. Court (4th DCA) Rules Servicer and Investor Did Not Violate HBOR

The Court of Appeals of California, Fourth District, recently affirmed summary judgment awarded in favor of the mortgage servicer and loan owner defendants on the borrowers’ claims for alleged violations of the California Homeowner Bill of Rights (HBOR), finding that the defendants properly contacted the borrowers and provided them with the required foreclosure information before recording the notice of default.

A copy of the opinion in Schmidt v. Citibank, N.A. is available at:  Link to Opinion.

The plaintiffs (“borrowers”) obtained a loan in 2007, secured by their residence.  In 2013, the borrowers defaulted and entered into a loan modification agreement with the loan owner.  The borrowers then defaulted on the loan modification agreement.

On March 10, 2014, the then mortgage servicer sent the borrowers a letter that contained documents that outlined their eligibility and the protections contained in the federal Servicemembers Civil Relief Act.  Between March 18 and Nov. 22, 2014, the servicer spoke to the borrowers multiple times regarding the status of their mortgage account, their financial situation, foreclosure avoidance options, and on at least three occasions provided them with a toll-free number for the Department of Housing and Urban Development (HUD).

The borrowers submitted a complete loan application to the servicer in March 2014, but the servicer denied the application.  The borrowers did not appeal this denial.

The servicer informed the borrowers via letter on Nov. 26, 2014 that they could request copies of their payment history and the note, the name of the entity that “holds the loan,” and any “assignments of mortgage or deed of trust required to demonstrate” the right to foreclose.

On Jan. 14, 2015, the servicer recorded a notice of default for the loan stating the amount that the borrowers had to pay to bring their account current.  The notice of default included a declaration averring that the servicer had contacted the borrowers.

On April 28, 2015, the servicer recorded a notice of trustee’s sale against the property.

The borrowers last made a payment on the loan in October 2013. The trustee’s sale had not occurred as of June 19, 2017. The borrowers filed suit against the loan owner and servicer.  The operative complaint sought to enjoin the sale and alleged that the defendants violated the HBOR (Cal. Civ. Code,  §§ 2923.55, 2923.6) and California Business and Professions Code § 17200 by not contacting the borrowers before recording the notice of default and properly informing them about their foreclosure alternatives.

The defendants moved for summary judgment supported by a declaration arguing that the undisputed facts demonstrated that they did not violate the HBOR or section 17200. The trial court granted the defendants’ motion for summary judgment.  This appeal followed.

Initially, the Appellate Court observed that the HBOR, “effective January 1, 2013, was enacted ‘to ensure that, as part of the nonjudicial foreclosure process, borrowers are considered for, and have a meaningful opportunity to obtain, available loss mitigation options, if any, offered by or through the borrower’s mortgage servicer, such as loan modifications or other alternatives to foreclosure.'” Civ. Code, § 2923.4, subd. (a).

As you may recall, California has amended the HBOR since its passage, but when the servicer recorded the notice of default, the HBOR required the servicer to send a letter informing the borrowers that they have the right to request certain loan documents before recording the notice of default.  See former Cal. Civ. Code, § 2923.55, subds. (a)-(b). A servicer or any other party also could not record the notice of default until 30 days after making initial contact with the borrower in person or by telephone to “assess” the borrower’s financial situation and to “explore” foreclosure alternative options. Id. The servicer must inform the borrower during this initial contact that they may request an additional meeting to take place within 14 days and provide the borrower with HUD’s toll-free phone number to find a HUD-certified housing counseling agency. Id.  A borrower may seek injunctive relief “to enjoin a material violation” of former section 2923.55, before anyone records a trustee’s deed upon sale. See former § 2924.12, subd. (a)(1).

The borrowers argued on appeal that disputed material facts regarding whether the defendants complied with former section 2923.55 before recording the notice of default should have precluded summary judgment.  The borrowers cited Mabry v. Superior Court, (2010) 185 Cal.App.4th 208, 215, to argue that whether a defendant complied with section 2923.55’s requirements is typically a “classic question of fact that” the trier of fact must resolve.

The Appellate Court noted that it construes the terms “assess” and “explore” narrowly “to avoid crossing the line from state foreclosure law into federally preempted loan servicing.”  Mabry, 185 Cal.App.4th at 232.  Thus, it limits exploration “to merely telling the borrower the traditional ways that foreclosure can be avoided (e.g., deeds ‘in lieu,’ workouts, or short sales), as distinct from requiring the lender to engage in a process that would be functionally indistinguishable from taking a loan application in the first place.” Id.

The Appellate Court found that the trial court correctly determined that the defendants “satisfied the requirements of former section 2923.55” before recording the notice of default.

Specifically, before recording the notice of default, the servicer initiated at least 11 phone calls with the borrowers, the husband borrower called and spoke to the servicer eight more times, and the servicer unsuccessfully tried to call the borrowers an additional 35 times.  During the phone calls the servicer discussed the following with the borrowers: a loss mitigation review; their loan modification application; payment options; the HUD referral phone number; the possible sale of the property; and offered to conduct a loss mitigation meeting several times. This evidence “clearly establishes” that the defendants made a prima facie showing that they met “all of the contact and notice requirements of former section 2923.”

The Appellate Court also found that the defendants made a prima facie showing that they “complied with the requirements of former section 2923.55, subdivision (b)(2) by fully reviewing and processing” the borrowers’ “loan modification application before recording the notice of default.”

The burden then shifted to the borrowers to come forward with evidence sufficient to give “rise to one or more triable issues of fact.”  The husband borrower presented evidence that before the servicer recorded the notice of default he did not recall any phone calls occurring or being offered a meeting to discuss foreclosure alternatives.  However, he did not actually deny the contacts or the contents of the discussions.

The Appellate Court found this insufficient to create a triable issue of material fact “and entitled the defendants to summary judgment.”

The borrowers also argued that a material fact dispute remained because the defendants did not initiate the contacts.  The Appellate Court rejected this argument because the evidence showed that the servicer initiated multiple contacts and because former section 2923.55 did “not require that a lender initiate the contact; rather, the statute requires only that the lender make contact in some manner and provide the borrower with an opportunity to discuss the borrower’s financial situation and possible options for avoiding foreclosure.”  To hold otherwise would have elevated “form over substance.”

The borrowers’ argument also failed because a violation of the statute’s provisions must be “material” to support a claim for an injunction.  Thus, when “the purpose of the statute is met — if the borrower has had an opportunity to have at least two substantive discussions with the lender regarding the borrower’s financial situation and possible options for avoiding foreclosure — then the fact that one or both of these discussions may have arisen as a result of the borrower initiating the telephone call with the lender or its agent cannot be considered to constitute a ‘material’ violation of the statute.”

Finally, because the borrowers’ claims for violations of section 17200 are predicated on their failed HBOR claims the trial court correctly found that the defendants are also entitled to summary judgment of their alleged section 17200 claims.

Accordingly, the Appellate Court affirmed the trial court’s judgment.

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Ernest Wagner practices in Maurice Wutscher's Commercial Litigation and Consumer Litigation groups, and leads the firm’s Insurance Recovery and Advisory group. Based in Chicago, he also supports the firm’s litigation matters in its Miami office. Ernest has substantial experience in various types of commercial and insurance recovery litigation. He has conducted more than 35 jury trials, and more than 150 arbitrations for plaintiffs and defendants. He has also successfully represented clients in numerous appeals, in various jurisdictions. Ernest earned his Juris Doctor from Emory University School of Law in Atlanta, Georgia, and his Bachelor of the Arts from the University of Iowa.

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