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Calif. App. Court (1st Dist) Rejects Servicer’s Attempt to Condition Reinstatement on Payment of Deferred Amounts

The Court of Appeal of the State of California, First Appellate District, recently held that California Civil Code § 2924c permits a borrower to reinstate a modified home mortgage loan by paying only the past due modified payments and associated fees and charges, and that a servicer cannot lawfully condition reinstatement of a loan on the payment of amounts that were deferred in the loan modification.

In so ruling, the Appellate Court rejected the servicer’s argument that the loan modification agreement allowed it to nullify the modification upon the borrower’s default and to require payment of the earlier default according to the original terms.

A copy of the opinion in Taniguchi v. Restoration Homes, LLC is available at:  Link to Opinion.

The borrowers obtained a loan modification that adjusted the principal balance, reduced the interest rate and monthly payments, and deferred accrued and unpaid interest and principal, fees, and foreclosure expenses.

The modification provided that failure to make modified payments as scheduled would be an event of default, the modification would be null and void at the lender’s option, and the lender would have the right to enforce the loan according to the original terms.

The servicer recorded a notice of default stating that the borrowers would have to pay the four missed monthly payments and associated late charges and fees, plus all the sums that had previously been deferred under the loan modification, in order to avoid foreclosure.

The borrowers asserted four causes of action against the servicer: violation of California Civil Code § 2924c, violation of California Business and Professions Code § 17200, et seq. (UCL), breach of contract, and breach of the covenant of good faith and fair dealing.

The trial court granted the servicer’s motion for summary judgment and denied the borrowers’ cross-motion for partial summary judgment.

The borrowers appealed the trial court’s grant of summary judgment to the servicer on their causes of action for violation of section 2924c and the UCL.

As you may recall, section 2924c(a)(1) provides that when a mortgage loan is accelerated as a result of a homeowner’s default, the homeowner can reinstate the loan by paying all amounts due, “other than the portion of principal as would not then be due had no default occurred.”

In other words, the homeowner can cure the default and reinstate his or her loan by paying the amount of the default, including fees and costs resulting from the default, rather than the entire accelerated balance.

The borrowers argued that under section 2924c, the servicer “could not lawfully condition reinstatement of their loan on the payment of amounts that were deferred in the loan modification.”  They argued that requiring them to pay the deferred balance, instead of just the missed payments plus costs, “essentially requires them to waive their right of reinstatement with respect to the modified loan.”

The servicer argued that the loan modification gave it the option to enforce the original loan terms if the borrowers defaulted on the modified loan, and because under the original loan pre-modification the deferred amounts were due and owing, the deferred amounts could properly be required as a condition of reinstatement under section 2924c.

The Appellate Court began its analysis by observing that the default was the failure to make payments on the modified loan.  Section 2924c gave the borrowers the opportunity to cure their precipitating default by making up those missed payments and paying the associated fees and charges.

In the Appellate Court’s view, demanding the deferred amounts after the loan was modified meant that the borrowers would have been in default throughout the term of the modified loan even if they timely made every required monthly payment.

If the borrowers had made all of their modified payments, as the Appellate Court explained, the servicer could not have claimed the deferred amounts until the end of the loan.

Thus, the Appellate Court concluded that the servicer failed to demonstrate that the borrowers could not prevail on their claim that the servicer violated section 2924c, and the trial court erred in granting summary judgment to the lender on this claim.

Because the servicer “failed to show that its conduct was consistent with section 2924c,” the Appellate Court also held it was an error to grant summary judgment on the UCL cause of action predicated on the violation of section 2924c.

Accordingly, the Appellate Court reversed the judgment and remanded for further proceedings.

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Eric Tsai practices in Maurice Wutscher’s Commercial Litigation and Consumer Credit Litigation groups, and in its Regulatory Compliance group. He concentrates his practice primarily on the defense of consumer and commercial financial services companies, including mortgage lenders and servicers, mortgage loan investors, third party debt collectors, and other financial services providers. He also counsels clients on regulatory compliance, licensing, and other consumer protection matters. Eric earned his undergraduate degree from the University of California, Irvine. Prior to attending law school, he worked as a loan officer for national direct lenders. He earned his Juris Doctor from California Western School of Law and thereafter obtained a Master of Laws (LLM) in Taxation from the University of San Diego School of Law. Eric publishes extensively on various issues affecting consumer lending and litigation, including both federal and California-specific developments. He is licensed to practice law in California, Nevada, and Oregon, and is admitted in all United States District Courts in the State of California, the United States District Court for the District of Oregon, the United States District Court for the District of Nevada, the U.S. Tax Court, and the Ninth Circuit Court of Appeals. He is also a licensed real estate broker in the State of California.

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