The Court of Appeal of the State of California, Second District, recently reversed a trial court’s dismissal of a complaint alleging a servicer violated California’s Homeowner’s Bill of Rights by proceeding with a trustee’s sale when the servicer and the borrowers were allegedly exploring a loan modification.
In so ruling, the Appellate Court made two key holdings:
First, the Appellate Court held that a borrower does not need to tender the balance due prior to instituting a suit for alleged violation of the HBOR.
Second, the Appellate Court also held that a borrower’s failure to timely provide the documents needed for a loan modification may not preclude a suit for alleged violation of the HBOR if the servicer failed to give the borrower adequate time to respond.
Two borrowers sued a servicer for proceeding with a trustee’s sale while loan-modification discussions were allegedly ongoing.
The borrowers alleged that, as of March 1, 2013, a new servicer took over their mortgage loan. Then, on March 13, 2013, the servicer allegedly sent a letter to the borrowers advising them of the potential for a loan modification. The letter allegedly asked the borrowers to submit a number of documents seven days before the foreclosure sale. That deadline was March 18, 2013. But the borrowers supposedly did not receive the letter until March 18, 2013.
The borrowers allegedly submitted financial information to the servicer on March 21, 2013. Further, the borrowers allegedly submitted additional financial information on March 23, 2013, after speaking with a representative for the servicer.
The servicer allegedly sent a letter to the borrowers on March 25, 2013, stating that they were not eligible for a loan modification, because there was a sale date scheduled within seven days. The servicer then proceeded with the non-judicial trustee’s sale on March 25, 2013.
The borrowers sued the servicer, alleging a number of causes of action. The pertinent portion of the opinion relates to the HBOR’s prohibitions against “dual tracking”— i.e., proceeding with a foreclosure while loan-modification negotiations are ongoing. See Cal. Civil Code 2923.6.
As you may recall, the HBOR states that a servicer cannot hold a trustee’s sale while a “complete application for a first lien loan modification” is pending. The HBOR defines a “complete” application as one where the “borrower has supplied the mortgage servicer with all documents required by the mortgage servicer within reasonable timeframes specified by the mortgage servicer.” Cal. Civil Code 2923.6(h).
If a borrower brings an HBOR claim pre-sale, it can ask the court for injunctive relief. See Cal. Civil Code 2924.12. The HBOR allows borrowers to sue servicers for actual economic damages post-sale, and allows for treble damages or statutory damages of $50,000 in the event of “[a] material violation found by the court to be intentional or reckless, or to result from willful misconduct.”
In this appeal, the servicer advanced two main arguments. First, the servicer argued that the borrowers could not bring an action under the HBOR until they tendered the principal balance due on the loan.
In making this argument, the servicer relied on the so-called “tender rule,” which forbids a borrower from setting aside a foreclosure sale on technical grounds unless the borrower made a showing that he or she could have paid off the loan. To support its position, the servicer relied on case law from before HBOR’s enactment.
The Appellate Court rejected this argument summarily, stating that such a holding would “completely eviscerate” the remedial nature of the HBOR. It also faulted the servicer for relying on pre-HBOR case law.
The Court also noted that “several unpublished federal district court cases have concluded that a plaintiff’s failure to allege tender of the loan balance does not alone defeat a plaintiff’s section 2923.6 claim. (See Bingham v. Ocwen Loan Servicing, LLC (2014 WL 1494005 (N.D. Cal.); Stokes v. CitiMortgage, Inc. (2014 WL 4359193 (C.D. Cal.).)”
Second, the servicer argued that, because the borrower did not respond to the request for information by the deadline in the letter, there was no “complete” loan application under the HBOR, and therefore the servicer had not violated the HBOR.
However, the Appellate Court pointed out that the borrowers alleged they did not receive the letter requesting the information until the day the information was due. Given this allegation, the Court found that there was at the least a triable issue of fact about whether the servicer gave the borrowers a “reasonable timeframe” to respond to the request for information.
Accordingly, the Appellate Court held that the trial court did not properly consider the sufficiency of the factual allegations to support the borrowers’ HBOR allegations, and reversed the trial court’s ruling on demurrer as to each of them.
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.