August Newsletter Highlights Reverse Mortgage Upheaval at HUD
The HBOR Collaborative’s August Newsletter includes an article from NHLP summer clerk Henna Choi. She discusses major developments in the reverse mortgage world, highlighting the plight of surviving, non-borrowing spouses who face foreclosure after the death of their borrower-spouse. We also include summaries of recent cases and a regulatory update.
August 2014 Newsletter
Reverse Mortgages: Recent Developments for Surviving, Non-Borrowing Spouses*
An impending foreclosure can compound a widow or widowers’ grief and devastation after losing his or her spouse. This heartbreaking scenario has gained national attention in recent years for its prevalence among older homeowners with reverse mortgages insured by the Department of Housing and Urban Development (HUD). In the past year, two somewhat high-profile cases, Bennett v. Donovan and Plunkett v. Donovan, have shed light on what happens to surviving, non-borrowing spouses once their partner, who borrowed the reverse mortgage alone, passes away. In each case, surviving spouses filed suit to prevent foreclosure on their homes, initiated by their lenders upon the deaths of their borrower spouses. In response to these lawsuits, HUD recently announced a prospective policy shift granting survivor spouses some protection from displacement. HUD’s reaction to these suits, though, has been disjointed and inadequate, especially as applied to couples with existing reverse mortgages that pre-date HUD’s new, forward-looking policy. This article provides an overview of HUD’s reverse mortgage program, the non-borrowing spouse problem, and recent developments in the reverse mortgage landscape; however, if you’d like to get know more about mortgages then it is suggested to visit this weblink.
Background: HUD’s Reverse Mortgage Program
In 1988, Congress created the Home Equity Conversion Mortgage (HECM) program, commonly known as the “reverse mortgage” program. Ostensibly, reverse mortgages provide financial support to elderly homeowners, allowing them to convert their home equity into cash:
Instead of [the borrower] paying the bank, the bank pays [the borrower] — either in a lump sum, or in monthly distributions — and interest accrues. When [the borrower] die[s] or move[s], [the borrower] or [his or her] heirs typically sell the home to pay off the loan, and keep any money left over if the house is worth more than the remaining balance.
Unlike traditional, or “forward” mortgages, reverse mortgages do not require borrowers to make monthly payments. Approved borrowers must, however, meet several statutory requirements including occupying the home as their primary residence and paying property taxes, utilities, and hazard insurance. The mortgaged property must also meet applicable housing quality standards determined by the Federal Housing Administration (FHA). A number of different events can render a loan due and payable, including the borrower’s death.
The HECM program offers the only federally-insured reverse mortgages available, and does so only through FHA-approved lenders. Proprietary reverse mortgages, conversely, are offered by private banks and are not subject to the federal reverse mortgage statutes or HUD regulations. Because HUD reverse mortgages are FHA-insured and generally offer better terms than proprietary reverse mortgages, “HECMs account for nearly all reverse mortgages made today in the U.S.,” totaling nearly 880,000 mortgages since the program’s inception.
The Non-Borrowing Spouse Problem
Bennett and Plunkett, the two recent cases challenging HUD’s reverse mortgage program, have revealed a loan origination issue that erupts only when foreclosure is imminent: the “non-borrowing spouse problem.” Until very recently, HUD instructed lenders to calculate the size of the reverse mortgage payout based primarily on the younger borrower’s age. As an outgrowth of this policy, a borrower’s advanced age increases the loan amount. Therefore, even if a couple qualified for a reverse mortgage as co-borrowers, removing the younger borrower from the home’s title rendered the older spouse the only potential borrower (and therefore the “youngest”); accordingly, the older spouse’s age maximized loan proceeds. This scenario became a tauntingly attractive option for retirees on fixed incomes facing a variety of expenses, including mounting healthcare costs.
Many lenders took advantage of HUD’s age-determinative method of calculating loan proceeds (and of borrowers’ legitimate financial insecurity concerns) to engage in predatory lending.
Advocates and industry experts report that lenders encouraged older couples to take out reverse mortgages with the older spouse as the only borrower because the resulting larger loans netted larger brokerage fees. All six Bennett and Plunkett plaintiffs, for example, were persuaded by their lenders to remove their names from their home’s title so their older spouses could qualify for larger loans. The plaintiffs were assured by their mortgage brokers that either spouse could remain in the home even if the named borrower passed away. In all six instances, however, the lenders demanded the surviving spouses immediately pay the loan balance or face foreclosure upon the borrowing spouse’s death.
Challenging HUD: Bennett v. Donovan & Plunkett v. Donovan
By allowing the lenders in Bennett and Plunkett to accelerate plaintiffs’ mortgages, HUD violated the federal statute governing the reverse mortgage program, 12 U.S.C. § 1715z-20. This statute prevents HUD from “insur[ing] a home equity conversion mortgage . . . unless such mortgage provides that the homeowner’s obligation to satisfy the loan . . . is deferred until the homeowner’s death,” or until another triggering event occurs. Critically, the statute specifies: “For purposes of this subsection, the term ‘homeowner’ includes the spouse of a homeowner.” HUD regulation 24 C.F.R. § 206.27, by contrast, instructs lenders to accelerate loans upon the death of the borrower if the home is no longer the principal residence “of at least one surviving mortgagor.”
The Bennett plaintiffs presented the first major challenge to this conflict between the statute and the regulation. Represented by the AARP Foundation, plaintiffs argued that by allowing a lender to foreclose on a surviving non-borrower, HUD had failed to comply with the plain language of § 1715z-20(j). HUD argued that, to gain the protection of this federal statute, “a person must be a homeowner,” and that since non-borrowers have “no ‘obligation to satisfy the loan’ . . . there is nothing to defer until [the non-borrower’s] death.” On remand from the D.C. Circuit, the D.C. District Court found HUD’s statutory construction unreasonable. The district court reasoned that if Congress had meant to deny surviving, non-borrowing spouses the opportunity to remain in their home, it would not have defined the term “homeowner” to explicitly include “the spouse of a homeowner.” The court granted plaintiffs’ summary judgment motion, ruling the HUD regulation invalid and contrary to the controlling federal statute.
The Bennett decision had the potential to mark a “turning point” for non-borrowing spouses facing foreclosure. The court, however, stopped short of ordering HUD to provide plaintiffs specific relief. Instead, it remanded the dispute to HUD to fashion appropriate relief of its own making. In previously remanding the case to the district court, the D.C. Circuit had suggested that HUD could provide “complete relief” to plaintiffs—and their lenders—by taking over the subject loans. The lenders would assign (sell) the reverse mortgages to HUD and, as the new owner of the loans, HUD would refrain from foreclosing on plaintiffs. As discussed below, HUD has rejected this somewhat straightforward solution.
Nearly five months after Bennett, and before HUD could muster an explicit response to that decision, four widows filed a class action against HUD on behalf of all surviving, non-borrowing spouses facing foreclosure after their spouses’ deaths. Mirroring Bennett, the Plunkett plaintiffs have challenged the HUD regulation allowing foreclosure despite the plaintiffs’ status as “homeowners” under the governing federal statute. Alongside their APA claim, the Plunkett plaintiffs seek injunctive relief to force HUD to “use its authority under the reverse mortgage statute to protect Plaintiffs and the Class from foreclosure and displacement.” The Plunkett litigation remains ongoing.
HUD’s Disjointed Reactions to Bennett & Plunkett
Over the past few months, HUD has begrudgingly responded to Bennett and Plunkett in half-measures, providing no clear relief for anyone. HUD first reacted to Bennett with Mortgagee Letter 2014-07, issued seven months after the decision and remand, and two months into the Plunkett litigation. HUD recognized the D.C. District Court’s (and the D.C. Circuit’s) interpretation of the operative HUD regulation and the “few viable options” left for non-borrowing spouses who want to remain in their homes. Due to “existing, legally binding contracts” with FHA-lenders, however, HUD refused to provide direct relief to the Bennett plaintiffs, or anyone else similarly situated. HUD did announce a significant change to its existing reverse mortgage scheme: for mortgages entered into on or after August 4, 2014, HUD will adopt the Bennett courts’ interpretation of the governing HUD regulation. Going forward, then, lenders cannot foreclose on surviving, non-borrowing spouses as long as those spouses remain in the home and meet other criteria.
Two months later, the D.C. District Court remanded Plunkett to HUD, ordering it to “provide notice to all HECM servicers clarifying . . . that servicers are eligible for two sixty-day deferrals without penalty (one prior to the initiation of foreclosure and one after).” HUD complied, issuing an “update” instructing HECM lenders that HUD would not take negative action (like denying their insurance claims) if the lenders voluntarily delayed foreclosing on survivor spouses during the deferral periods. HUD put the onus on the lenders, however, requiring them to “prepare . . . detailed Extension Requests” to delay foreclosure in each case.
Days later, HUD issued Mortgagee Letter 2014-10, prohibiting lenders from engaging in misleading or deceptive program descriptions as they negotiate mortgages with potential borrowers. Apparently, HUD had “become aware of a variety of marketing and advertising strategies currently employed or being proposed by mortgagees to encourage borrowers to obtain HECMs.” While the letter is silent on the non-borrowing spouse problem, HUD’s language and the letter’s timing suggest that HUD discovered these lender abuses by litigating Bennett and Plunkett.
Finally, not two weeks later, HUD referred to a previous “determination” allowing only the Bennett and Plunkett lenders to assign the six reverse mortgages taken out by the named plaintiffs to HUD. Additionally, HUD extended the two 60-day extensions conceded in its previous “update,” allowing lenders to delay foreclosure “indefinitely” and still preserve their right to file insurance claims with FHA. HUD subsequently released revised tables that lenders should use to calculate potential reverse mortgage proceeds for mortgages originating on or after August 4, 2014.
Holes in HUD’s Approach
HUD’s halting and ad hoc approach is inadequate to resolve the non-borrowing spouse problem. First, it still leaves thousands of spouses at risk of displacement. Requiring mortgages entered into on or after August 4, 2014 to “contain a provision deferring due and payable status until the death of the last surviving Non-Borrowing Spouse” is cold comfort to borrowers and their spouses with current reverse mortgages unaffected by this prospective policy shift. The proposed change also applies only to married couples living together at loan origination. If a couple marries after loan origination, the non-borrowing spouse has no displacement protections at all. If the couple divorces, the non-borrowing spouse’s HECM rights are terminated. Second, the assignment solution currently available to the Bennett and Plunkett plaintiffs, and being considered for wider application, will not actually help the plaintiffs, as written. None of the named plaintiffs meet all of HUD’s “murky” criteria for assignment eligibility. Third, HUD’s stop-gap measures—the assignment option and the time extensions—are elective, not required. Even if a plaintiff met all required assignment criteria, or if a non-plaintiff met the time extension criteria, their lenders could still foreclose. Finally, HUD’s many updates, determinations, and mortgagee letters are extraordinarily difficult to follow, for both attorneys and elderly borrowers.
HUD regulation 24 C.F.R. § 206.27 has left, and continues to leave, grieving and widowed spouses stripped of their family homes. While HUD has made a significant, pro-surviving spouse policy shift applied to reverse mortgages originating on or after August 4, 2014, the agency remains unwilling to compel lenders to refrain from foreclosing on current surviving spouses. Courts will likely decide the legality of HUD’s proposed regulations, assignment option, and elective time extensions later this year in Plunkett. Until then, advocates representing reverse mortgagors and their families should closely follow the ongoing saga at HUD. As the general population ages and more elderly clients find themselves in precarious financial situations, monitoring the shifts in the reverse mortgage landscape can help advocates better serve their clients.
Summaries of Recent Cases
Unpublished & Trial Court Decisions
Viable Deceit, Promissory Estoppel & Negligence Claims Based on Proprietary TPP
Akinshin v. Bank of Am., N.A., 2014 WL 3728731 (Cal. Ct. App. July 29, 2014): Deceit (a type of common law fraud) requires: 1) misrepresentation; 2) knowledge of falsity; 3) intent to defraud; 4) justifiable reliance; and 5) causal damages. Borrowers must plead a fraud claim with specificity. In the foreclosure context (involving mostly corporate defendants) specificity has come to include: “the names of the persons who made the representations, their authority to speak on behalf of the corporation, to whom they spoke, what they said or wrote, and when the representation was made.” Here, borrowers alleged servicer made four misrepresentations: 1) borrowers “qualified” for a permanent loan modification; 2) they were “qualified” for a permanent modification if they made their trial period plan (TPP) payments; 3) they were being “considered” for a permanent modification during the TPP; and 4) after the TPP, they “qualified” for a permanent modification and would soon receive paperwork. Ultimately, servicer denied borrowers a permanent modification, rendering these statements deceitful. Borrowers identified the name of the servicer employee, their position in the corporation, and the date each statement was made. The Court of Appeal found these allegations specific enough to pass the pleading stage. The court rejected the trial court’s narrow interpretation of the word “qualify” as denoting “some type of eligibility, not final [modification] approval.” Borrowers reasonably understood “qualify” to mean that TPP payments were required to receive a permanent loan modification offer. Since “competing inferences are possible” at the demurrer stage, the court found borrowers had met the misrepresentation element of their claim.
The court also found borrowers to have adequately pled justifiable reliance and damages. Specifically, borrowers had “held off” exploring other foreclosure alternatives, including bankruptcy. This court found that mere forbearance, “the decision not to exercise a right or power—is sufficient . . . to fulfill the element of reliance necessary to sustain a cause of action for fraud.” The court also concluded that making TPP payments during borrowers’ default, choosing to resume paying at least part of their mortgage, in other words, when they otherwise would have continued to pay nothing, constitutes damages at the demurrer stage. The Court of Appeal therefore reversed the trial court’s grant of servicer’s demurrer to borrowers’ deceit claim.
Promissory estoppel (PE) claims require borrowers to allege a clear and unambiguous promise, reasonable and foreseeable reliance on that promise, and injury caused by their reliance. “To be enforceable, a promise need only be ‘definite enough that a court can determine the scope of the duty, and the limits of performance must be sufficiently defined to provide a rational basis for the assessment of damages.’” Here, borrowers alleged a servicer representative promised that if borrowers made timely TPP payments, they would “qualify” for a loan modification. Borrowers’ duty to make TPP payments is sufficiently definite; and it at least implied a resulting servicer duty to offer borrowers a permanent modification “unless [servicer] learned new facts that would affect their ‘qualification’” (emphasis added). Because servicer based its denial on borrowers’ insufficient income—a previously known fact, not a new one—servicer made a sufficiently clear and unambiguous promise. The court further found that borrowers’ reliance, their TPP payments, were foreseeable as “an explicit condition o[f] the promise.” The reasonableness of borrowers’ reliance is a question of fact unfit for resolution at the pleading stage. The TPP payments themselves constituted sufficient damage (see deceit discussion above). The court reversed the grant of servicer’s demurrer on borrower’s PE claim.
Negligence claims require servicers to owe borrowers a duty of care. Within the context of a traditional borrower-lender relationship, banks generally do not owe a duty to borrowers. An exception applies, however, if a lender’s activities extend beyond this relationship, which some courts analyze using the six-factor Biakanja v. Irving test. This court took a unique approach to resolving borrowers’ claim that servicer negligently withheld that borrowers’ income was insufficient to obtain a modification. Servicer could (and should) have informed borrowers they could not qualify for the modification, rather than promising them they would qualify if they performed under the TPP. This court “construe[d] the cause of action for negligence as one for negligent misrepresentation, providing an alternate legal theory to fraud . . . and promissory estoppel.” After agreeing that the “no-duty” rule is a general rule, not absolute, and citing the Biakanja factor test with approval (but avoiding applying the factors here), the court cited Lueras v. BAC Home Loans Servicing, LP, 221 Cal. App. 4th (2013) for the proposition that banks have a general duty not to lie to borrowers about their modification applications. Rather than granting borrowers leave to amend their complaint to bring a claim for negligent misrepresentation, as the Lueras court did, this court (somewhat confusingly) held that borrowers had sufficiently stated a claim for negligent misrepresentation, but then reversed the trial court’s grant of servicer’s demurrer to borrower’s negligence claim.
CCP 1161a: Tenants, Former Homeowners Defend Eviction by Alleging Improper Notice & Failure to Prove Duly Perfected Title
Opes Invs., Inc. v. Yun, No. 30-2013-661818 (Cal. App. Div. Super. Ct. Orange Cnty. July 16, 2014): In post-foreclosure unlawful detainer (UD) actions, both former homeowners and existing tenants require notice to quit before an eviction can commence. To be effective, these notices must be properly served: 1) by personal service; 2) if personal service fails, by substitute service and by mailing a copy; 3) if the first two methods fail, by posting the notice at the residence and mailing a copy. CCP § 1162. Plaintiff bears the burden of showing compliance with these notice requirements as part of his or her prima facie UD case. Here, the purchaser of a foreclosed home brought a UD against the former homeowner and the tenant residing in the home and prevailed on its summary judgment motion. Defendants appealed, arguing that while plaintiff alleged compliance with post-foreclosure notice requirements, it submitted no evidence showing notice was actually served on tenant. Tenant provided his lease agreement as evidence of his tenancy and continued possession of the property. He also gave evidence that he was never personally served a notice to quit, never received notice by mail, and that the notice was never posted at the property. The Appellate Division agreed that plaintiff failed to meet its burden of demonstrating proper service of tenant’s notice to quit. Further, the former homeowner disputed that plaintiff’s proffered copy of her notice to quit was ever personally served, mailed, or posted at the home, contrary to plaintiff’s declaration of service. This creates a triable issue of material fact and renders summary judgment improper. The Appellate Division reversed the trial court’s grant of plaintiff’s motion for summary judgment.
In addition to properly served notice(s) to quit, post-foreclosure UD plaintiffs must demonstrate that the foreclosure sale complied with the foreclosure procedures outlined in CC 2924, that plaintiff purchased the property, and duly perfected title. CCP § 1161a. And “to prove compliance with [CC] 2924, a plaintiff must necessarily prove the sale was conducted by the trustee authorized to conduct the trustee’s sale.” Here, the Appellate Division found plaintiff had failed to show either that it purchased the home, or that the foreclosure sale complied with CC 2924. As evidence of purchase, plaintiff offered the declaration of a man “with a beneficial interest in [an unidentified] trust” who was “personally familiar with . . . plaintiff’s books and records that relate to the subject premises.” Confusingly, the declarant also stated that he, not plaintiff, was the “bona fide purchaser” of the property. The court found the trial court erred in not sustaining defendants’ evidentiary objections based on declarant’s lack of foundation and contradictory statements. Additionally, the trustee’s deed upon sale listed the purchaser as “Opes Investments,” while the plaintiff identifies itself in its complaint as “Opes Investments, Inc.” Plaintiff offered no evidence that these two entities are identical. Nor did plaintiff offer any evidence whatsoever that the sale complied with CC 2924. Accordingly, the court reversed the trial court’s grant of summary judgment to plaintiff.
“Pursuing” Foreclosure Sale Can Constitute Dual Tracking; Distinguishing HAMP from Proprietary TPP Contract Claims
Pittell v. Ocwen Loan Servicing, LLC, No. 34-213-00152086-CU-OR-GDS (Cal. Super. Ct. Sacramento Cnty. July 28, 2014): CC 2923.6 prevents a servicer from “conduct[ing]” a foreclosure sale while a borrower’s modification application is pending. After a failed TPP and servicing transfer, this borrower faxed in another complete loan modification application to her new servicer, as per servicer’s instructions, more than two weeks before a scheduled sale. Servicer refused to cancel the sale, forcing borrower to get a TRO and preliminary injunction. Consistent with its PI ruling, this court found an adequately pled dual tracking claim. Servicer’s continued pursuit of the foreclosure sale after receiving borrower’s complete application, and before making a written determination on that application, violated CC 2923.6. “Regardless of whether the language in . . . 2923.6(c) prohibiting [servicers] from ‘conducting a trustee’s sale’ requires postponing the sale or canceling the sale . . . [servicer] did neither.” Servicer’s unabated pursuit of the sale violated HBOR’s dual tracking provision. The court overruled servicer’s demurrer to borrower’s HBOR claim.
California borrowers who comply with HAMP TPP agreements are entitled to permanent modifications; if a servicer refuses to offer a modification, borrowers may sue for breach of contract. There are currently no published cases to support this proposition applied to non-HAMP (“proprietary”) TPPs. Here, borrower entered into a proprietary TPP agreement and made the first two payments. Servicer returned the second payment and transferred borrower’s loan to a new servicer, which refused to re-instate the TPP, instead soliciting a new application. Borrower brought breach of contract claims against each servicer alleging that each had failed to provide her with a permanent modification. This court distinguished the HAMP TPP cases from this case in three ways. First, borrowers in West and Corvello alleged they fully complied with their TPP agreements. Here, borrower alleged she only made two of three TPP payments. Second, the TPPs at issue in the HAMP cases explicitly promised borrower a permanent modification upon TPP completion. It used the words “will offer” a permanent modification. By contrast, the TPP at issue here used the permissive “may” to describe a servicer’s obligations after successful TPP completion. Third, the courts in the HAMP cases grafted HAMP directives onto the TPP agreements, rendering them enforceable contracts. Here, borrower’s proprietary TPP enjoys no such outside support. The court granted servicer’s demurrer to borrower’s contract claim.
Pleading Requirements: “Change in Financial Circumstances” & Pre-NOD Outreach; Negligence Claim Survives under Lueras Logic; UCL Standing
Lee v. Wells Fargo Bank, N.A., No. 34-2013-00153873-CU-OR-GDS (Cal. Super. Ct. Sacramento Cnty. July 25, 2014): Evidence is not required for a borrower to proceed past the pleading stage. These borrowers based their wrongful foreclosure claim on dual tracking violations and a pre-NOD outreach allegation; servicer demurred largely based on borrower’s failure to provide evidence. First, borrowers had not demonstrated a “material change in financial circumstances” that would have triggered dual tracking protections applied to their second modification application. The court rejected this argument because borrowers’ complaint was not required to “contain or identify ‘evidence’ to withstand demurrer.” Further, borrowers pled they faxed servicer a note stating they were separating and their “home and financial situation had changed.” Servicer did not argue the fax was insufficient to state a material change in financial circumstances. Relatedly, the court rejected servicer’s argument that “judicially noticeable documents indicate that [borrowers were] ‘unable to submit bank documents’ in support of [their] requested modification.” Servicer had not demonstrated it is impossible for borrowers without bank accounts to obtain modifications, and servicer would have to submit “extrinsic evidence,” inappropriate at the demurrer stage, to do so. Second, borrowers alleged servicer’s recorded NOD declaration (alleging compliance with CC 2923.5) was false, and that borrowers were never contacted before servicer recorded the NOD. The court granted judicial notice to the declaration’s existence, but not to its veracity. The court also accepted borrowers’ factual allegations as true at the pleading stage, so their pre-NOD outreach claim and alleged dual tracking violation formed the basis for borrowers’ valid wrongful foreclosure claim. The court overruled servicer’s demurrer.
To allege negligence, borrowers must show their servicer owed them a duty of care. Generally, banks owe no duty to borrowers within a typical lender-borrower relationship. Under Lueras v. BAC Home Loan Servicing, however, servicers do owe a duty “to not make material misrepresentations about the status of an application for a loan modification or about the date, time, or status of a foreclosure sale.” Here, borrowers alleged servicer simultaneously mailed them two packets: one offering a TPP agreement, the other stating servicer had not received all the necessary paperwork. A servicer representative told borrowers to “ignore” the TPP offer. Over the next several months, borrowers submitted all requested documentation and servicer continually sent conflicting correspondence, acknowledging receipt of documents and then requesting the same documents again. As pled, these allegations amount to “material misrepresentations about the status of [borrowers’] application.” Rather than granting borrowers leave to amend to state a negligent misrepresentation claim, as the Lueras court did, this court cited Lueras in overruling servicer’s demurrer to borrower’s general negligence claim.
Viable UCL claims must establish that the borrower suffered economic injury caused by defendant’s misconduct. If borrower’s default occurred prior to any alleged misconduct, standing is difficult to show because the default most likely caused the economic injury (foreclosure), regardless of a defendant’s misdeeds. Here, servicer argued borrowers’ default caused the foreclosure, not servicer’s mishandling of borrowers’ modification application. In their opposition to the demurrer (but not in their complaint), borrowers differentiate between the foreclosure, which they admit was largely caused by their default, and other losses including moving expenses, lost equity, lost income (two boarders had been renting from borrowers), and lost business (borrowers ran a home-based business from the property). These other losses, borrowers argued, resulted from servicer’s mishandling of the modification process. Though skeptical on borrowers’ ability to “parse out” these injuries and their causes, the court sustained the demurrer but granted borrowers leave to amend to adequately allege UCL standing.
HBOR Violations are Outside “Scope” of Unlawful Detainer Actions and Not Barred by Res Judicata
Bolton v. Carrington Mortg. Servs., LLC, No. 34-2013-00144451-CU-OR-GDS (Cal. Super. Ct. Sacramento Cnty. July 24, 2014): Generally, an unlawful detainer (UD) judgment has a limited res judicata effect and does not prevent UD defendants from bringing post-UD actions to resolve title. The Malkoskie exception to this general rule, however, states: if the title suit is “founded on allegations of irregularity in a trustee’s sale,” res judicata bars the subsequent action. Here, borrowers brought a post-UD suit against servicer, but not to resolve a title issue. Rather, borrowers alleged dual tracking and SPOC violations and sought damages under CC 2924.12. HBOR violations are “not within the scope of the unlawful detainer action. Indeed, nothing in [CCP 1161a] requires that an unlawful detainer plaintiff show that it complied with [HBOR] as part of proving tits right to possession.” CCP 1161a only requires UD plaintiffs to show, inter alia, the sale complied with foreclosure procedures outlined in CC 2924, and duly perfected title. A suit based on HBOR violations does not, then, “necessarily challenge the validity of the foreclosure sale,” and were not fully litigated as part of the UD. Accordingly, the court overruled servicer’s demurrer to borrower’s HBOR claims.
Pleading Requirements: “Issue with [Borrower’s] Mortgage Title” Negating Contract Formation is Factual Issue
Barnett v. Ocwen Loan Servicing, LLC, No. 34-2013-00155929-Cu-BC-GDS (Cal. Super. Ct. Sacramento Cnty. July 22, 2014): A borrower’s factual allegations asserted in the complaint must be taken as true for purposes of evaluating a demurrer. Here, borrower brought a breach of contact claim against her servicer, alleging full compliance with her TPP and servicer’s breach of borrower’s permanent modification. After mailing borrower the permanent modification agreement, servicer informed borrower that she was ineligible for the modification because “there was ‘an issue with your mortgage title.’” Because valid title was a condition precedent to contract formation, servicer argued no contract had formed. This “argument is a factual one that is not appropriately resolved on demurrer.” Borrower alleged full compliance with all TPP requirements, including making TPP payments and submitting all required documentation. At the pleading stage, these allegations sufficiently state a breach of contract claim under West. The court overruled servicer’s demurrer.
Preliminary Injunction & Bond: Dual Tracked NTS is Void and must be Rescinded, Hearsay is Not Evidence of HBOR Compliance
Pugh v. Wells Fargo Home Mortg., No. 34-2013-00150939-CU-OR-GDS (Cal. Super. Ct. Sacramento Cnty. July 7, 2014): To win a preliminary injunction in California state court, a borrower must show a likelihood of prevailing on the merits and that they will be more harmed if the injunction does not issue, than the servicer would be if the injunction did issue. Here, borrowers alleged a valid dual tracking claim. After submitting a complete loan modification application, borrowers received a denial letter from servicer, but without explanation or a notice regarding their appeal period. This, and servicer’s subsequent recording of an NTS, violated different aspects of HBOR’s dual tracking statute (CC 2923.6(f) and (c), respectively). Servicer argued it had remedied its dual tracking violations, since the court’s grant of the TRO, by providing borrowers with an appeal period and denying their appeal. The court found two problems with this reasoning. First, the NTS, by violating HBOR’s dual tracking provision, is void and servicer needs to rescind that NTS and re-record a valid NTS before moving forward with foreclosure. “In an analogous situation under the foreclosure statutes, a filing of a notice of default before complying with Civil Code 2923.5 renders the notice void.” Second, servicer submitted no admissible evidence to support a finding that it had indeed remedied its dual tracking violations. Servicer’s attorney submits a declaration “not based on personal knowledge and all documents attached thereto are hearsay.” The court found borrowers likely to prevail on their dual tracking claim, and because the foreseeable harm to borrowers far outweighs the potential harm to servicer, the court granted the preliminary injunction. The court ordered borrowers to post a one-time $15,000 bond, as well as $1,600 monthly payments, the estimated fair market rent for the property.
CC 2924.17 Claim; Fraud Claim Based on Verbal Forbearance Agreement Is Not Subject to Statute of Frauds; Promissory Estoppel Claim
Doster v. Bank of Am., N.A., No. 34-2013-00142131-CU-OR-GDS (Cal. Super. Ct. Sacramento Cnty. July 1, 2014): One of the most well-known aspects of HBOR is its “robo-signing” statute, CC 2924.17. Specifically, section (b) requires a servicer to “ensure that it has reviewed competent and reliable evidence to substantiate the borrower’s default and [its] right to foreclose.” Here, borrower adequately pled two separate CC 2924.17 violations. First, servicer recorded an NOD, citing borrower’s default, apparently before reviewing borrower’s loan information. Specifically, borrower “had fully paid under his forbearance agreement,” and was not in default at all. The court agreed with borrower that, had servicer verified the borrower’s loan status as statutorily required, it would have discovered borrower’s forbearance agreement. Second, borrower alleged that in response to his request for servicer to verify its right to foreclose, servicer “could not identify the party on whose behalf it was servicing the note,” citing two separate entities. The court overruled servicer’s demurrer to borrower’s CC 2924.17 claims.
Fraud allegations require: 1) a misrepresentation; 2) servicer’s knowledge of its falsity; 3) intent to induce borrower’s reliance; 4) borrower’s actual reliance; and 5) damages. Here, borrower alleged servicer falsely promised a forbearance agreement, followed by loan modification negotiations, and finally, a modification. In reliance on these promises, borrower tendered over $30,000 to servicer, believing it would result in the promised forbearance agreement or modification. Borrower alleged servicer never intended to execute a forbearance agreement because it “was not the true servicer of the loan.” In addition to the significant payment, borrower chose to forgo a deed in lieu or an earlier foreclosure (he still would have lost the house, but would have saved $30,000). The court found that borrower sufficiently alleged intent to induce reliance, actual reliance, and resulting damages. The court also rejected servicer’s argument that the statute of frauds foils borrower’s fraud claim. The statute of frauds merely prevents borrowers from bringing claims to enforce a verbal forbearance agreement. It does not prevent borrowers from anchoring fraud claims on verbal promises, even if those promises relate to land contracts and would—as contracts—be subject to the statute of frauds. The court overruled servicer’s demurrer to borrower’s fraud claim.
To state a claim for promissory estoppel, a borrower must allege: 1) a clear and unambiguous promise; 2) reasonable and foreseeable reliance on that promise; and 3) actual injury to the alleging party. Here, borrower alleged servicer promised to offer him a loan modification and to negotiate a “forbearance/modification.” Relying on Aceves v. US Bank, 192 Cal. App. 4th 218 (2011), the court found that borrower’s allegations regarding the promise to negotiate sufficiently supported his promissory estoppel claim. In this amended complaint, borrower also pled an unambiguous promise to offer a modification because he specified the exact terms of the proposed modification. Borrower’s reliance was detrimental and resulted in damages, for instead of allowing servicer to foreclose and “cutting his losses,” he made significant payments to servicer. The court overruled servicer’s demurrer.
The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) Requires Borrowers to Exhaust Administrative Remedies before Affirmatively Suing Failed Bank
Rundgren v. Wash. Mutual Bank, F.A., __ F.3d __, 2014 WL 3720238 (9th Cir. July 29, 2014): FIRREA “grant[s] ‘the FDIC, as receiver, broad powers to determine claims asserted against failed banks.’” FIRREA maps out a precise process by which borrowers may assert claims against failed banks outside of the judicial system. Specifically, 12 U.S.C. § 1821(d)(13)(D) requires borrowers to exhaust administrative remedies by requesting relief from the receiver and, if their claim is denied, requesting an administrative review. Only then can borrowers bring claims against the bank in a state or federal court. Here, borrowers did not assert a claim with the FDIC, but instead brought affirmative claims against WaMu, a failed bank that was placed into an FDIC receivership, in state court. Chase, the current owner and servicer of borrowers’ loan, had initiated nonjudicial foreclosure proceedings against borrowers, who sued to stop the foreclosure. The Ninth Circuit panel found borrowers’ fraud-based claims to be “claims” within the meaning of FIRREA’s exhaustion statute, and not “affirmative defenses” as borrowers argued. In nonjudicial foreclosures, a borrower’s affirmative suit can bar or stop an impending foreclosure, but it is still an affirmative suit, not a defense. And because borrowers’ claims relate to WaMu’s “act or omission,” the Ninth Circuit affirmed the district court’s finding that FIRREA applies to borrowers’ claims and borrowers had not exhausted FIRREA’s administrative remedies. The panel dismissed the suit for lack of jurisdiction.
TILA Rescission Rights: Ninth Circuit Declines to Extend Yamamoto; Equitable Tolling of RESPA’s SOL
Merritt v. Countrywide Fin. Corp., __ F.3d __, 2014 WL 3451299 (9th Cir. July 16, 2014): Under TILA’s rescission provision, a borrower exercising their rescission rights must first notify the creditor of his or her intent to rescind. Once the creditor returns the security interest, the borrower must tender the property to the creditor. The goal, basically, is to return the parties to their original, pre-loan positions. This rescission sequence “shall apply except when otherwise ordered by a court.” Here, borrowers exercised their rescission rights on a mortgage loan and with a home equity line of credit (“HELOC”). When their lender did not respond to the rescission, borrowers filed suit. Borrowers did not allege in their complaint, however, that they tendered their HELOC payment to their lender before filing suit. The district court therefore dismissed borrower’s TILA claim. This district court ruling dangerously extended Yamamoto v. Bank of New York, 329 F.3d 1167 (9th Cir. 2003). The Yamamoto court held that district courts may require borrowers to provide evidence of their ability to tender the rescinded loan as a condition of defeating a creditor’s summary judgment motion. The Merritt district court extended that holding to require borrowers to plead tender in their complaint, just to survive the pleading stage. The Ninth Circuit panel reversed, holding that alleging tender, or the ability to tender, is not required to support a rescission claim at the pleading stage. Moreover, the panel held that courts may only alter TILA’s statutory rescission sequence (requiring tender before rescission, for example) at the summary judgment stage. Even then, courts may do so only on a case-by-case basis once the creditor has established a potentially viable defense.
RESPA prohibits settlement-service providers, like real estate agencies and title insurers, from accepting fees or kickbacks for business referrals. Borrowers must bring their claims within one year of the violation. Here, borrowers sued almost three years after loan origination. The district court dismissed borrower’s RESPA claim as time-barred without considering whether equitably tolling may apply to when borrowers actually received their loan documents. Here, the loan documents revealed the alleged mark-ups that tipped borrowers off to the alleged appraisal kickback scheme. The Ninth Circuit panel vacated the dismissal, holding that, despite RESPA’s SOL, equitable tolling may apply to suspend the SOL until the borrower discovers (or has a reasonable opportunity to discover) the alleged violations. “Just as for TILA claims, district courts may evaluate RESPA claims case-by-case ‘to determine if the general rule [of limitations] would be unjust or frustrate the purpose of the Act.’” The panel remanded for reconsideration.
Preliminary Injunction & Bond: “Complete Application” & HBOR’s National Mortgage Settlement (NMS) Safe Harbor
Gilmore v. Wells Fargo Bank, N.A., 2014 WL 3749984 (N.D. Cal. July 29, 2014): In the Ninth Circuit, a borrower seeking a preliminary injunction must show, inter alia, at least serious questions going to the merits of their claim: here, a dual tracking claim. Borrower submitted an allegedly complete application, using only his income information, as instructed by a servicer representative. Instead of processing the application, servicer called borrower repeatedly to request unnecessary income information from borrower’s live-in girlfriend. Servicer’s requests were confusing and not made in writing, as was its practice in the past. Servicer also sent borrower a letter openly admitting to dual tracking: “Foreclosure is active and a foreclosure sale date is currently scheduled . . . . However, your mortgage loan is currently being reviewed for possible payment assistance . . . .” Finally, servicer never provided borrower a written denial. Proceeding with the scheduled sale then, would violate HBOR’s dual tracking statute. The court found “at least serious questions” regarding the completeness of borrower’s application and granted the preliminary injunction. Bond was set at borrower’s previous monthly mortgage payments ($1,800), paid to a trust, not directly to servicer.
As long as the NMS is in place, a signatory that is NMS-compliant, with respect to the individual borrower bringing suit, is not liable for various HBOR violations, including dual tracking. CC § 2924.12(g). Here, servicer proffered three arguments invoking the NMS safe harbor, none of which worked. First, servicer argued its compliance with the NMS is more or less presumed, and that borrower bears the burden of proving servicer was not compliant. The court disagreed, rightly reading the HBOR safe harbor as an affirmative defense and NMS compliance to be proved by the servicer. Second, servicer argued it was compliant. The court found two possible NMS violations to defeat this argument: 1) servicer did not provide an online portal for borrower to check the status of his application; and 2) servicer dual tracked borrower by proceeding with foreclosure when he had submitted an application more than 37 days pre-sale. Finally, and somewhat uniquely, servicer “argue[d] that its compliance can only be determined according to the report issued by the [national NMS] monitor. . . . [and to] the extent that [HBOR] is interpreted to create a different standard of ‘compliance’ that is not in the NMS, . . . allowing California courts to interpret the NMS would invade the District of Columbia court’s exclusive jurisdiction.” This court disagreed with servicer’s jurisdictional interpretation, finding HBOR’s safe harbor provision crystal clear: “The plain meaning of that [safe harbor provision] demonstrates that a defendant must comply with the terms with respect to the borrower in question.” There is no ambiguity to be interpreted. Further, the national NMS monitor “does not govern the administration of California law.” The court quickly dispatched with servicer’s NMS-related arguments.
Diversity Jurisdiction: Trustee’s Nonmonetary Status & Amount in Controversy
Fisk v. Specialized Loan Servicing, LLC, 2014 WL 3687312 (C.D. Cal. July 24, 2014): A defendant may remove a state action to federal court based on diversity jurisdiction if the amount in controversy exceeds $75,000 and the claim(s) arise between citizens of diverse (different) states. Diversity jurisdiction requires complete diversity between all opposing parties and the defendant bears the burden of showing that removal is proper. Here, a California citizen brought state HBOR claims against her servicer and the foreclosing trustee. Servicer, a citizen of Delaware and Colorado, removed the case to federal court. The complaint identified trustee as a Texas company “but [did] not provide any further allegations regarding its citizenship.” Nor did servicer “elaborate” on trustee’s citizenship in the notice of removal or their opposition to borrower’s motion to remand. In sum, servicer did not prove complete diversity between the borrower and trustee. The court also rejected servicer’s argument that trustee’s citizenship “is irrelevant for jurisdiction purposes” because trustee filed an uncontested declaration of nonmonetary status. Rather, the court found, such entities are still bound by any nonmonetary aspects of the judgment, and “the citizenship of [trustee] may not be ignored for diversity purposes because it has filed a Declaration of Nonmonetary status.” Even if diversity had been established, the court found servicer had failed to show, by a preponderance of the evidence, that the amount in controversy exceeded $75,000. Servicer argued the value of the subject property currently in foreclosure (but not yet sold) should constitute the amount in controversy. While that valuation may be accurate for cases where borrowers seek to quiet title or rescind their loan, borrower here seeks damages “in an unspecified amount” and injunctive relief related to her HBOR claims. As such, servicer has not proven that the amount in controversy exceeds the statutory requirement. The case was remanded.
Diversity Jurisdiction: Filing Notice of Removal Required for Removal to Take Effect
Roberts v. Greenpoint Mortg. Funding, 2014 WL 3605934 (C.D. Cal. July 22, 2014): A defendant may remove a state action to federal court if the federal court has subject matter jurisdiction (“SMJ”) over the matter. Federal courts can exercise SMJ in two ways: 1) over a federal claim; or 2) over a state claim arising between citizens of diverse (different) states. If it appears, at any time before final judgment, that the federal court lacks SMJ, that court must remand the case to state court. Diversity jurisdiction requires complete diversity between all opposing parties and the defendant bears the burden of showing that removal is proper. Here, a California borrower brought state law claims in state court against his servicer and the trustee conducting the foreclosure sale, a California company. As allowed by California law, trustee filed a Declaration of Non–Monetary Status under CC 2924l. Servicer then removed the case to federal court based on diversity, arguing that trustee’s California citizenship was irrelevant to the court’s diversity analysis because the Declaration rendered trustee a “nominal” party. Borrowers, however, filed a timely objection to the Declaration before servicer filed its notice of removal with the state court, a necessary part of making a removal effective. And because original federal jurisdiction must exist at the time removal became effective, borrower’s timely objection thwarted servicer’s removal attempt. Relatedly, borrower’s objection renders trustee’s participation in the action necessary, and its citizenship an indispensable part of the court’s diversity analysis. Failing to find complete diversity, then, the court granted borrower’s motion to remand.
Viable Pre-NOD Outreach and UCL Claims; Failed “Authority to Foreclose” Claim; Dual Tracking Claim Must Assert Specific Facts to Support “Complete” Application
Woodring v. Ocwen Loan Servicing, LLC, 2014 WL 3558716 (C.D. Cal. July 18, 2014): Servicers must contact (or diligently attempt to contact) borrowers at least 30 days before recording an NOD to assess the borrowers’ financial situation and explore foreclosure alternatives. Servicers must include a declaration of their compliance with this pre-NOD outreach requirement with the recorded NOD. Here, servicer’s NOD declaration attested to its compliance. Borrower, however, specifically alleged that servicer never contacted her or made efforts to contact her. At the pleading stage, this clear factual contradiction was enough to defeat servicer’s motion to dismiss. Borrower’s multiple loan modification applications did not change the court’s calculus because borrower also alleged servicer “failed to respond meaningfully” to these applications. There was no pre-NOD discussion, in other words. Finally, servicer’s continual postponement of the foreclosure sale does not leave borrower without a remedy. Both a sale postponement and a servicer’s compliance with the statute—the actual pre-NOD outreach—are essential parts of a CC 2923.5 remedy. Servicer has made no attempts to discuss foreclosure alternatives with borrower, so it has yet to remedy its statutory violation. The court denied servicer’s MTD.
CC 2924(a)(6) restricts “the authority to foreclose” to the beneficiary under the DOT, the original or properly substituted trustee, or a designated agent of the beneficiary. When a substitution of trustee occurs after an NOD is recorded, but before an NTS is recorded, servicers must mail a copy of the substitution to anyone who should receive a copy of the NOD, and include an affidavit of compliance with this requirement. CC § 2934a. Here, the servicer mailed a copy of the substitution of trustee, and an affidavit, to all relevant parties prior to recording the NTS. The court therefore dismissed borrower’s CC 2924(a)(6) claim.
Servicers may not move forward with foreclosure while a borrower’s complete, first lien loan modification is pending. The “completeness” of an application is determined by the servicer. CC § 2923.6(h). Here, borrower alleged she had “submitted ‘a multitude of complete’ first lien loan modification applications within the meaning of [CC] 2923.6(c)” to her servicer. She did not provide, however, further factual support such as the dates of her submissions or any documents showing that servicer deemed her applications “complete.” The court dismissed borrower’s dual-tracking claim but granted her leave to amend to allege specific facts supporting her complete application claim.
To have UCL standing, a borrower must suffer an injury-in-fact and lost money or property as a result of alleged unfair competition. Here, borrower alleged servicer’s failure to engage in pre-NOD outreach caused her to “suffer[ ] ‘pecuniary loss’ . . . due to the imposition of ‘unjustifiable foreclosure fees.’” Although an actual foreclosure sale has not yet occurred, this court concluded that the initiation of foreclosure proceedings satisfies the injury-in-fact requirement and confers UCL standing. The court denied servicer’s MTD.
Breach of Permanent Modification, Damages
Le v. Bank of New York Mellon, 2014 WL 3533148 (N.D. Cal. July 15, 2014): To allege breach of contract, a borrower must show, inter alia, the existence of a contract and damages. Here, borrower alleged servicer sent him a Loan Modification Agreement that permanently modified his mortgage, requiring interest-only payments for ten years and establishing a stable interest rate for seven years. Borrower signed and returned the agreement to servicer and commenced making modified payments. Soon after, servicer sent borrower letters referring to significant arrears and a higher monthly payment. Over a year after one of borrower’s early modified payments, servicer returned the payment as insufficient. Borrower applied for subsequent modifications until finally a new servicer initiated foreclosure proceedings. Borrower brought contract-related claims against the original servicer, which the court agreed were valid. The Loan Modification Agreement was a contract with specific terms and borrower had adequately pled damages. Servicer’s modification breach directly caused the current foreclosure proceedings – the NOD referred to a default on principal and interest and, under the agreement, borrower was only required to pay interest during the artificial default period. The default, then, would not exist absent servicer’s failure to accept borrower’s modified payments. Nor are damages limited to borrower’s returned payment, as servicer argued. Instead, borrower lost the stability of his interest rate, accrued late fees, and damaged his credit. Borrower’s default alone, over $200,000, constitutes damages because servicer caused the default. Lastly, borrower’s arrears likely “hindered” is attempts at other modifications. The court denied servicer’s motion to dismiss borrower’s contract-related claims.
Servicing Transfer Notice Requirements under TILA: Equitable Tolling, Actual & Statutory Damages
Vargas v. JP Morgan Chase Bank, N.A., __ F. Supp. 2d __, 2014 WL 3439062 (C.D. Cal. July 15, 2014): TILA requires any new creditor or assignee of a debt to notify the borrower in writing of the transfer or assignment of a loan. Borrowers have a private right of action to recover damages for violations of this TILA provision, but must bring their claims within one year of the violation. This statute of limitations is subject to equitable tolling, however, in limited circumstances. A borrower must allege specific facts explaining his failure to discover the violation within the statutory period. Here, borrower’s loan was transferred in 2011 without proper notice. Borrower did not file his TILA claim until 2014, arguing the SOL should toll as he was unaware of assignee’s claimed ownership interest because he did not receive the required copy of the assignment. Further, he argued he was not obliged to check the recorder’s office for evidence of any transfer. Essentially, borrower alleged the violation itself constituted the conditions necessary for equitable tolling. The court disagreed, noting that “the violation and tolling are not one and the same.” Tolling the SOL whenever a borrower alleged improper disclosures would effectively render the SOL meaningless. The court granted servicer’s MTD on the SOL issue.
A transferee servicer (assignee) must notify the borrower of a loan’s transfer, in writing, within 30 days. 15 U.S.C. § 1641(g). To recover actual damages for violations of this TILA provision, borrowers must show they detrimentally relied on the failed disclosure. They must, in other words, demonstrate how knowledge of the transfer would have resulted in a benefit to them, or conversely, how their lack of knowledge of the transfer proved detrimental. Here, borrower alleged his loan was assigned in 2013 (a separate assignment from the 2011 transfer, discussed above) without proper notice. He further claimed proper notice would have given him ample time to protect his “property interests.” The court disagreed; borrower failed to demonstrate a causal connection between the transferee servicer’s failure to disclose the transfer and borrower’s property interests. Borrower is entitled to statutory damages, however. While acknowledging the split among district courts as to whether a borrower must plead actual damages to also recover statutory damages, the court followed central district precedent and allowed borrower’s independent recovery of statutory damages under a plain reading interpretation of 15 U.S.C. § 1640.
Valid Former CC 2923.5 Claim with No Pending Sale
Tavares v. Nationstar Mortg., LLC, 2014 WL 3502851 (S.D. Cal. July 14, 2014): Former CC 2923.5 required servicers to contact borrowers (or to diligently attempt to contact borrowers) to discuss their financial situation and possible foreclosure options and to then wait 30 days before filing an NOD. The only available remedy was a postponement of the foreclosure sale to allow for the statutorily required discussion. Here, borrowers alleged servicer made no actual or attempted contact prior to recording the NOD. The court accepted this allegation at the pleading stage and denied servicer’s motion to dismiss. In so doing, the court rejected servicer’s arguments that: 1) its NOD declaration, subject to judicial notice, establishes CC 2923.5 compliance; 2) the five-year, continual postponement of the trustee’s sale renders borrowers’ claim without a remedy; and 3) a computer printout of a letter allegedly sent to borrowers shows servicer’s CC 2923.5 compliance. On the last point, the court pointed out that nothing in the printout indicates that the letter was actually sent or received by borrowers.
Diversity Jurisdiction: Timing of Trustee’s Nonmonetary Status Filing & Meaning of a “Nominal” Party
Pardo v. Sage Point Lender Servs., LLC, 2014 WL 3503095 (S.D. Cal. July 14, 2014): A defendant may remove a state action to federal court based on diversity jurisdiction if the claim(s) arise between citizens of diverse (different) states. The defendant bears the burden of showing that removal is proper and “all grounds for removal must be stated in the notice of removal.” In evaluating diversity, federal courts “disregard nominal . . . parties and [evaluate diversity] jurisdiction only upon the citizenship of real parties to the controversy.” In the foreclosure context, CC 2924l allows trustees to file a Declaration of Nonmonetary Status,” basically excusing them from the lawsuit. Trustees are therefore frequently considered “nominal” parties. Here, a Californian borrower brought state-law claims against the foreclosing trustee, also a “citizen” of California. Evaluating the parties’ diversity, the court analyzed whether the trustee’s nonmonetary status rendered it a nominal party, which would have allowed the court to discount its Californian citizenship for diversity purposes and ensured removal. The court agreed with borrower, however, that trustee had not met its removal burden for three reasons. First, the court granted that filing a Declaration of Nonmonetary Status may grant a trustee nominal status, but only if filed properly. Under CC 2924l, fifteen days must pass—without plaintiffs’ objection—before the Declaration is effective. Here, defendants removed the case to federal court a mere six days after trustee filed its Declaration, which therefore had “no effect at the time of removal.” Second, just because trustees are “often” considered nominal parties does not mean they should be considered such in every instance. Here, for example, borrower “actually su[ed trustee] for wrongdoing, not merely as a formal party in order to facilitate collection.” Unlike true nominal parties then, this trustee has something “at stake” in the litigation. Finally, the court refused to consider trustee’s additional arguments not included in the notice of removal. The court remanded the case.
Borrowers Fraudulently Induced to Sign Unfavorable Modification with Promises of a Better Mod in the Future; Equitable Tolling Analysis on Promissory Estoppel Claim; UCL Causation
Peterson v. Wells Fargo Bank, N.A., 2014 WL 3418870 (N.D. Cal. July 11, 2014): Fraud claims have a heightened pleading standard that requires borrowers to allege “the who, what, when, where, and how” of the alleged fraudulent conduct. Here, borrower pled his servicer fraudulently induced him to agree to a financially burdensome “modification” agreement, promising that a better modification would be forthcoming in one year and would “negate” the unfavorable terms of the first modification. No new modification was granted and borrower now faces foreclosure. Borrower met the heightened pleading standard: 1) he identified the servicer representative who made the fraudulent promise by name; 2) the month and year of the promise; 3) where the promise was made (over the phone); and 4) the “what” and “how” –the exact representations servicer made and how they never came to pass. The court also found that borrower had adequately pled damages resulting from servicer’s fraudulent promise: borrower’s attorney’s fees and accumulating late fees. The court denied servicer’s motion to dismiss borrower’s fraud claim.
There is a two-year statute of limitations for promissory estoppel claims, unless the borrower can take advantage of equitable tolling. “Generally, a litigant seeking equitable tolling bears the burden of establishing two elements: 1) that he has been pursuing his rights diligently; and 2) that some extraordinary circumstances stood in his way.” Here, borrower alleged that servicer reneged on its promise more than two years before borrower initiated his suit. He argued for equitable tolling, however, because servicer kept stringing him along after its initial denial of a second loan modification, urging borrower to “try again later.” The court accepted servicer’s argument that these representations were statutorily required because servicer was “obligated to continue to consider borrowers for loan modification options as long as programs remain available.” Borrower could not show, then, that extraordinary circumstances stood in his path toward litigation. The court granted servicer’s motion to dismiss borrower’s promissory estoppel claim as time-barred.
Viable UCL claims must establish that the borrower suffered economic injury caused by defendant’s misconduct. Here, borrower’s valid fraud claim served as a basis for their “unlawful” prong UCL cause of action. Further, this court adopted the view that borrowers may allege “causation more generally” at the pleading stage. Here, for example, borrower alleged he spent financial resources improving the property, relying on servicer’s promise that a better modification would be granted in the near future. At the pleading stage, this allegation was enough to establish UCL standing. The court denied servicer’s MTD.
Debt Collector, as Third-Party Contractor and Agent for HOA, May be Liable under FDCPA & UCL for Davis-Stirling Violations
Hanson v. JQD, LLC, 2014 WL 3404945 (N.D. Cal. July 11, 2014): California’s Davis-Stirling Act “regulates a [home owner association’s (HOA)] ability to collect debts owed by its members.” Specifically, HOAs may not “impose or collect an assessment or fee that exceeds the amount necessary to defray the costs for which it is levied,” or refuse a homeowner’s partial debt payment. Further, an HOA may only recover “reasonable costs incurred in collecting the delinquent assessment,” and capped late fees and interest. In other words, an HOA cannot profit from debt-collection. California courts have interpreted the Act to mean: 1) while an HOA cannot profit from debt collection, third-party debt-collectors hired by an HOA are not so restricted; and 2) a debt-collector’s fees, while legal, cannot “exceed the [HOA’s] costs.” Here, the HOA hired a third-party debt-collector to recover homeowner’s delinquent assessments. The debt-collector provided “No Cost Non-Judicial Collections” (emphasis added), charging homeowners directly for any costs associated with collecting delinquent fees. In this particular debt-collection attempt, debt-collector charged homeowner “collection fees,” “vesting costs,” “management collection costs” and “other charges.” These fees would have clearly violated the Davis-Stirling Act had the HOA charged them. On a previous motion to dismiss, the court decided that a debt-collector participating in these activities, as an agent for the HOA, could also violate the Act. The court concluded that a third-party debt collector’s rights cannot exceed those of the HOA that hired them because the debt-collector has no independent rights against the homeowner. The “right” to impose debt collection fees stems directly from the HOA’s right to do so. On this second motion to dismiss, the court echoed its prior reasoning: “If the Davis-Stirling Act prohibits an HOA from engaging in a particular debt collection practice, the [HOA] cannot circumvent the act’s protections simply by employing [the third-party debt collector] as its agent.” The court found all of debt-collector’s business practices at issue here to violate the Davis-Stirling Act and provide the basis for homeowner’s FDPCA and UCL claims. Specifically, debt-collector had charged homeowner fees “never incurred” by the HOA; charged prohibited late fees and interest rates; initiated foreclosure when homeowner owed less than the statutory minimum ($1,800); refused to accept homeowner’s partial payments; and failed to apply homeowner’s payments to her assessment debt. The court denied debt-collector’s motion to dismiss homeowner’s complaint.
Preliminary Injunction & Bond: Denied on “Document & Submit” Requirements, Granted on SPOC Claim
Shaw v. Specialized Loan Servicing, LLC, 2014 WL 3362359 (C.D. Cal. July 9, 2014): In the Ninth Circuit, a borrower seeking a preliminary injunction must show, inter alia, at least serious questions going to the merits of their claim: here, a dual tracking claim. Dual tracking protections are afforded to borrowers who submit a second modification application if they can “document” and “submit” to their servicer a “material change in financial circumstances.” Here, borrower agreed to a permanent modification pre-HBOR and then applied for a second modification post-HBOR. Though borrower alleged in his ex parte preliminary injunction application that he was discharged from bankruptcy, lost income and health benefits, and that he submitted these financial changes to his servicer, he did not provide evidence that he actually submitted specific documentation to his servicer. As other courts have found, this court reasoned that alleging a change in financial circumstances in a complaint (or PI application) does not fulfill the “document” and “submit” requirements of CC 2923.6(c). The court denied borrower a PI based on his dual tracking claim.
HBOR requires servicers to provide a single point of contact (SPOC) “[u]pon request from a borrower who requests a foreclosure prevention alternative.” CC § 2923.7(a). SPOCs may be an individual or a “team” of people and have several responsibilities, including informing borrowers of the status of their applications and helping them apply for all available loss mitigation options. Here, borrower pled he specifically requested a SPOC “more than once,” and was shuffled from one unknowledgeable representative to another. On several occasions, he could not even speak with a person, but was sent directly to an automated recording. No one could provide him with the status of his loan or modification application. These allegations sufficiently stated a SPOC claim. After finding irreparable harm, that the balance of hardships tips in borrower’s favor, and the public interest of allowing homeowners “the opportunity to pursue what appear to be valid claims before they are evicted from their homes,” this court granted borrower’s request for a preliminary injunction. The court set the bond at borrower’s monthly mortgage payments under his first, pre-HBOR modification level.
A SPOC “Team” Must Still Perform Statutory Duties; Rescinding an NOD Cures Dual Tracking Violation
Diamos v. Specialized Loan Servicing, LLC, 2014 WL 3362259 (N.D. Cal. July 7, 2014): HBOR requires servicers to provide borrowers with a “single point of contact,” or SPOC, during the loan modification process. SPOCs may be an individual or a “team” of people and have several responsibilities, including: facilitating the loan modification process and document collection, possessing current information on the borrower’s loan and application, and having the authority to take action, like stopping a sale. Importantly, each member of a SPOC team must fulfill these responsibilities. Here, borrower was encouraged to submit four loan modification applications by several servicer representatives and received “conflicting information by multiple [servicer] employees.” The court disagreed with servicer that borrower had to allege these representatives were not a SPOC team to successfully state a SPOC claim. Rather, borrower need only plead “sufficient facts to reasonably support the inference that the person she spoke with regarding her loan modification were not members of a team.” Borrower adequately pled those facts: none of the representatives she spoke with had the “‘knowledge and authority’ to perform the required statutory responsibilities.” No one could provide her with a “straight answer” on the status of her application(s). The court dismissed the complaint on jurisdiction grounds, but allowed that if borrower can correct those pleading issues, she has a valid SPOC claim.
“A mortgage servicer . . . shall not be liable for any [HBOR] violation that it has corrected and remedied prior to the recordation of a trustee’s deed upon sale . . . .” CC § 2924.12(c). Here, servicer improperly recorded an NOD while borrower’s first lien loan modification application was pending, violating HBOR’s dual tracking provision. Servicer argued their rescission of the NOD mooted borrower’s dual tracking claim and the court agreed. “By rescinding the [subject] notice of default, [servicer] is currently free of liability stemming from recording that [NOD].” This holding provides support for advocates arguing that rescission of an NOD or NTS is necessary before a servicer may move forward with the foreclosure process—simply denying a borrower’s modification and then moving ahead with sale is insufficient to “correct and remedy” an invalid NOD or NTS.
A National Bank May Invoke HOLA to Defend its Own Conduct
Hayes v. Wells Fargo Bank, N.A., 2014 WL 3014906 (S.D. Cal. July 3, 2014): The Home Owners’ Loan Act (HOLA) and the (now defunct) Office of Thrift Supervision (OTS) governed lending and servicing practices of federal savings banks. HOLA and OTS regulations occupied the field, preempting any state law that regulated lending and servicing. Here, borrower brought a UCL claim against her servicer, a national bank, alleging improper escrow fees. Normally, national banks are regulated by the National Banking Act and Office of the Comptroller of the Currency (OCC) regulations. Under those rules, state laws are only subject to conflict preemption and stand a much better chance of surviving a preemption defense. Borrower’s loan originated with a federal savings association, which then assigned the loan to Wachovia, which merged with Wells Fargo, a national bank. Rather than apply the HOLA preemption analysis to a national bank without evaluating that logic, this court acknowledged the “growing divide in the district courts’ treatment of this issue” and its three different options: 1) HOLA preemption follows the loan, through assignment and merger; 2) national banks can never invoke HOLA; or 3) application of HOLA should depend on the nature of the conduct at issue—the federal savings association’s conduct can be defended with HOLA preemption, but the national bank’s conduct cannot. Here, the court chose the first option, relying on the reasoning in Metzger v. Wells Fargo Bank, N.A., 2014 WL 1689278 (C.D. Cal. Apr. 28, 2014). In a footnote, the court summed up the basis the Metzger court’s reasoning as: the OTS’s “opinion letters, the rationale behind the HOLA preemption regulation, and the fact that [borrowers] agreed that the loan would be governed by HOLA” at loan origination. Applying HOLA field preemption, the court found borrower’s UCL claim preempted because it was based in improper escrow allegations, and escrow accounts are specifically named as preempted in the OTS regulations. The court dismissed borrower’s action.
FCRA & CCRAA: Borrower Sufficiently Pled “Inference” That Servicer Misreported Credit Information, Damages
Giessen v. Experian Info. Solutions Inc., 2014 WL 4058419 (C.D. Cal. July 2, 2014): The Federal Credit Reporting Act (FCRA) requires that, upon notice from a credit reporting agency (CRA), “furnishers” of credit information (including servicers), “modify, delete, or permanently block the reporting of information the furnisher finds to be ‘inaccurate or incomplete.’” California’s Consumer Credit Reporting Agencies Act (CCRAA) gets at the same issue: “[a] person shall not furnish information on a specific transaction or experience to any consumer credit reporting agency if the person knows or should know the information is incomplete or inaccurate.” This case involves somewhat of a twist to the usual fact-pattern: borrowers alleged their servicer claimed it actually complied with the FRCA and CCRAA by notifying CRAs that borrowers were not actually late on their mortgage payments. Servicer claimed the CRA improperly continued to report borrower’s loan delinquent. Borrowers disagreed, alleging that servicer must have miscommunicated with the CRAs, or failed to conduct a “reasonable investigation” into the credit dispute. The court agreed with borrowers: although their complaint was “modest in detail,” borrowers created enough of an inference that servicer breached one or more of its statutory duties and continued to report the loan delinquent after borrowers disputed the report. Therefore, the court declined to dismiss borrowers’ FCRA and CCRAA claims. The court also rejected servicer’s argument that borrowers’ alleged emotional distress cannot constitute damages. Damages for mental and emotional distress are recoverable under both the FCRA and CCRAA, and borrowers need not allege they were denied credit or that inaccurate information was sent to third parties to recover those damages. Both statutes also provide for punitive damages, appropriate for the reckless behavior alleged here. The court found borrower’s allegations sufficient to state a claim for punitive damages.
Viable Contract Claims for Failure to Provide Foreclosure Notices & Reinstatement Figure
Siqueiros v. Fed. Nat’l Mortg. Ass’n, 2014 WL 3015734 (C.D. Cal. June 27, 2014): To state a breach of contract claim, a borrower must allege: 1) the existence of a contract; 2) borrower’s performance or excused nonperformance; 3) servicer’s breach; and 4) resulting damages. The breach must be “a substantial factor in causing the damages.” Here, borrower alleged her servicer breached her DOT by failing to provide her with an NOD or NTS before the foreclosure sale. Under the DOT, those notices were required to be “delivered to Borrower’s notice address” or to “the Property Address,” and “deemed to have been given to Borrower when mailed by first class mail.” Servicer mailed the NOD and NTS to an address completely unrelated to the property or to borrower (notices were also faxed to a number unconnected to borrower). As a result, borrower discovered the foreclosure sale after it occurred. The court concluded that the servicer’s alleged failure to send the notices to the borrower’s address was “a substantial factor” in causing her damages: the loss of her home. The court rejected servicer’s argument that borrower’s pre-notice default absolved servicer of its obligation to provide foreclosure notices. The court also rebuffed servicer’s argument that the DOT only required it to “mail[ ] something somewhere.” Borrower also pled a second successful breach claim related to servicer’s failure to timely provide her with a reinstatement amount. The DOT required servicer to provide a reinstatement figure “five days before sale of the Property,” allowing borrower an opportunity to cure the default and avoid foreclosure. Servicer, however, refused to give her the exact amount until it was too late. The court agreed with borrower that this allegation sufficiently stated a breach of contract claim. Accordingly, the court denied servicer’s motion to dismiss borrower’s breach of contract claim to the extent it related to servicer’s failure to provide foreclosure notices and a reinstatement figure.
The implied covenant of good faith and fair dealing is read into every contract and prevents one party from depriving the other of the benefits imparted by the contract. To distinguish it from a straight breach of contract claim, the good faith claim must allege “something beyond breach of the contractual duty itself.” Here, the court found servicer’s failure to give borrower a timely reinstatement figure provided the basis for her viable good faith and fair dealing claim. Servicer’s failure frustrated borrower’s ability to benefit from the DOT by reinstating her loan and avoiding foreclosure. The court disagreed with servicer that, in the absence of a clear reinstatement amount from servicer, borrower should have paid the amount listed in the NOD. That was impossible in this case, where borrower never received an NOD. Accordingly, the court denied the motion to dismiss borrower’s good faith and fair dealing claim, but only as it related to the reinstatement figure.
Recent Regulatory Updates
Freddie Mac Single-Family Seller/Servicer Guide Bulletin 2014-14 (July 15, 2014) (effective dates as noted)
Mortgage Modification Settlements (effective December 1, 2014)
New automated settlement process. As of August 25, 2014, servicers may submit required settlement data through the new “Loan Modification Settlement” screen in Workout Prospector for modifications of conventional first lien Freddie Mac-owned or guaranteed mortgages. This submission process will be required as of December 1, 2014.
Mortgage modification signature requirements. A servicer and any borrowers may agree to extend, modify, forbear, or make any accommodations with regard to a Fannie Mae/Freddie Mac Uniform Security Instrument or the Note without the co-signer’s “signature or consent.” This provision only applies, however, if the Security Instrument originally signed by the co-signer included a provision permitting this action.
Transfers of Ownership and Assumptions (effective September 15, 2014)
Chapter 60 of the Single-Family Seller/Servicer Guide has been updated and reorganized. It now contains more detailed requirements relating to transfers of ownership: (1) protected by federal law restricting the exercise of a due-on-transfer clause (the Garn-St. Germain Act); (2) where servicers must ascertain whether a mortgage transferee is creditworthy; and (3) where the transferee seeks to assume the mortgage. These changes respond to the “widows & orphans” problem whereby a borrower’s heir or ex-spouse inherits or receives title to the property (through death or divorce) and cannot obtain a loan modification because they are not the “borrower” on the note.
FHA, VA, or RHS Insured Mortgages (effective September 15, 2014)
Updated requirements for filing claims for insurance or guaranty benefits. If the claim filing for a mortgage is subject to a recourse obligation, including indemnification, the servicer must file the claim in its own name so that the claim payment will be paid directly to the servicer. If the claim filing for a mortgage is not subject to a recourse obligation or indemnification, the servicer must submit the claim in Freddie Mac’s name so that payment will go directly to Freddie Mac.
Attorney Fees and Costs (effective October 20, 2014)
Freddie Mac has updated it requirements for reimbursing attorney fees and court costs where pre-foreclosure mediation is required by state or local law, as well as mediation manager and/or coordinator fees.
Foreclosure Sale Bidding
Where a first lien mortgage is not covered by mortgage insurance or when state law does not mandate that an appraisal report be used to set the credit bid, servicers must obtain a bid through the Freddie Mac Service Loans application. If Freddie Mac updates or changes the credit bid, it will inform the servicer before the foreclosure sale date. Servicers are required to cooperate with Freddie Mac and ensure that foreclosure counsel receives the updated information so as not to delay, cancel or stop the sale. Where the servicer is unable to give the updated information to foreclosure counsel in a timely manner, or where foreclosure counsel could not use the updated bidding instructions, the servicer must provide documentation of such fact in the file. A foreclosure sale must not be delayed due to a servicer’s receipt of an updated credit bid.