September Newsletter Breaks Down new Mortgage Servicing Comparison Chart

The HBOR Collaborative’s September Newsletter includes an article describing the Collaborative’s new mortgage servicing comparison chart for california real estate, highlighting usage tips, explaining the most important concepts, and briefly discussing which bodies of law are “better”: the CFPB mortgage servicing rules, California’s Homeowner Bill of Rights, or the National Mortgage Settlement. The newsletter also includes summaries of recent cases, including important state cases like Alvarez, Fonteno, and Mendoza.


September 2014 Newsletter


In this issue—The HBOR Collaborative has created a chart comparing the servicing rules under the Consumer Financial Protection Bureau, California’s Homeowner Bill of Rights, and the National Mortgage Settlement. It is attached to the end of the Newsletter, but also available on the HBOR Collaborative website. Recent case summaries including important state cases: Fonteno, Alvarez, Mendoza, and Yvanova.


Too Many Choices: Navigating the Mortgage Servicing Maze

Constantly flipping through various code sections, official guidance, consent judgments exhibits, and toggling through 20-odd statutes online can be overwhelming and frustrating. And yet, advocates representing homeowners facing foreclosure must navigate at least three sources of law and regulations to effectively evaluate potential claims, develop pleadings, and negotiate with servicers. The HBOR Collaborative has therefore developed a comprehensive chart that compares these laws and regulations side by side. Ideally, this chart will clarify the CFPB mortgage servicing rules, HBOR, and the National Mortgage Settlement –and how these laws interact—and help California advocates more effectively (and quickly) employ these important tools on behalf of borrowers.

Sources of law & regulation

Created by the Dodd-Frank Act,[1] the Consumer Financial Protection Bureau’s (CFPB) new mortgage servicing rules add to and amend the existing federal framework provided by the Real Estate Settlement and Procedures Act (RESPA) and the Truth in Lending Act (TILA),[1] and became effective January 10, 2014. These are federal regulations and apply nationally. California’s Homeowner Bill of Rights (HBOR), by comparison, is state law and only applicable to California residences. Finally, the chart includes the National Mortgage Settlement (NMS) servicing rules, which are not creatures of state or federal law, but derive instead from a court settlement between 49 state attorneys general and five of the country’s largest mortgage servicers and the use of a Los Angeles Mortgage Broker is also helpful for dealing with mortgages.[2] The chart cites to the exhibits attached to the consent judgments that came from this settlement.

Using this chart

Advocates should note several things before incorporating this chart into their practice. First, it is not exhaustive. In an effort to make these laws accessible and digestible, the chart only briefly describes the various code sections, statutes, and exhibit excerpts. Once oriented, advocates should refer to the cited provisions for greater context and accuracy. Further, the chart does not answer questions dealing with small servicers, under either the CFPB or HBOR definitions. And there are surely fact scenarios that this chart does not address: it covers the most common loss mitigation situations and problems. Second, the chart tracks a typical, nonjudicial foreclosure timeline, rather than following the circuitous ordering of rules prevalent in all three sources. It also begins with topics that will determine which law can possibly apply to a specific situation, including effective dates, entities regulated and property protected, and who can file suit. Advocates should work through the first two pages to determine if they even have a choice of law before moving on to more specific topics like appeal timelines.

Key concepts

This chart addresses the issues listed below (or at least points advocates in the right direction, depending on the fact-pattern at issue). But because these issues are so critical to mortgage servicing law, and arguably affect any fact-pattern subjected to chart analysis, we briefly note the most common and important topics:


Even though the CFPB servicing rules are federal law, promulgated under RESPA and TILA, Congress tailored them specifically to coincide with existing and future state law and regulations. Very few of the CFPB rules, therefore, preempt more protective state laws (rules governing servicing transfers are the main exceptions), so advocates will generally be able to select whichever law is more tailored to their client’s situation. In fact, as noted and cited in the chart, drafters referred particularly to HBOR and the NMS as bodies of law that may contain more borrower-friendly provisions, depending on a particular situation. Advocates should think of the CFPB rules as a protective floor, not a ceiling.

HBOR’s NMS “Safe Harbor”

Relatedly, as advocates evaluate whether to cite HBOR or NMS rules (in a demand letter for example), they should note that HBOR is inapplicable in certain situations, for a somewhat unobvious reason. There is a “safe harbor” provision in HBOR, under CC 2924.12(g):

A signatory to [the NMS] that is in compliance with the relevant terms of the Settlement . . . with respect to the borrower who brought an action pursuant to this section while the consent judgment is in effect shall have no liability for a violation of sections 2923.55, 2923.6, 2923.7, 2924.9, 2924.10, 2924.11, or 2924.17.

The “with respect to the borrower” language is important. First, advocates should analyze whether the servicer was compliant with the NMS, not generally, but as applied to the specific client in question. If servicer was noncompliant, then the safe harbor does not apply and servicer is susceptible to HBOR liability. If servicer was compliant with every aspect of the NMS as applied to the client,[1] then it escapes HBOR liability. Though some servicers have routinely argued borrowers must demonstrate servicer’s NMS noncompliance to adequately plead HBOR claims, courts have rejected this argument. The safe harbor is an affirmative defense, to be proved by the servicer.[2] An easy way to forestall this argument, however, is to prepare to demonstrate servicer’s NMS noncompliance from the beginning of the representation.

Private right of action

Advocates should constantly keep this issue in mind (the chart addresses it in the “Who can sue?” space). Borrowers have a private right of action to sue under both RESPA and HBOR. There are exceptions to the types of claims they can bring and which particular borrowers can sue (noted in the chart). Critically, borrowers have no private right of action to enforce NMS provisions.


The CFPB rules only provide for damages under RESPA statutes.[3]  Borrowers cannot use the CFPB rules to stop a foreclosure sale,[4] but injunctive relief is available under HBOR. On the other hand, a pre-foreclosure cause of action for damages is available under RESPA but unavailable under HBOR, which only allows for damages post-sale. Because there is no private right of action under the NMS, there are no remedies.

So which law is better?

Broadly speaking, HBOR provides greater dual tracking protections because borrowers have no deadline to submit their modification application: as long as servicer receives borrower’s complete first lien loan modification application before a foreclosure sale, the servicer cannot move ahead with the sale while the application, or an appeal period, is “pending.”[1] The CFPB rules provide complete dual tracking protections to borrowers who submit their application in their first 120 days of delinquency or before their loan is referred to foreclosure.[2] Post-NOD, however, CFPB protections depend on when a complete loan modification application is submitted. If a borrower submits an application more than 37 days pre-sale, a servicer cannot conduct the sale until making a determination on the application,[3] but only borrowers who submit their application 90 or more days pre-sale are entitled to an appeal of this decision.[4] By contrast, all borrowers (with large servicers)[5] receive an appeal opportunity under HBOR.[6] Borrowers who submit their application less than 37 days before a scheduled foreclosure sale receive no dual tracking protections from the CFPB rules.[7] The CFPB rules also provide that a “facially complete application,” where a servicer later determines that more

information or clarification is necessary, must be treated as “complete” as of the date that it was facially complete.[1] HBOR does not contain such distinctions and leaves the “completeness” of an application up to the servicer and to the courts.[2] Under HBOR, a borrower may submit more than one application, and gain dual tracking protection, if they can “document” and “submit” a material change in financial circumstances to their servicer.[3] The CFPB rules only grant dual tracking protections to one application, making no exceptions for a change in financial circumstances.

On pre-foreclosure outreach, the CFPB rules may be slightly more borrower-friendly. RESPA established an absolute freeze on initiating foreclosure activity: servicers must wait for borrowers to become more than 120 days delinquent before recording the notice of default.[4] HBOR, by contrast, only prevents servicers from recording a notice of default for 30 days after servicer made (or attempted to make) contact with a delinquent borrower.[5] HBOR specifies that pre-NOD contact be made “in person or by telephone,” to discuss foreclosure alternatives,[6] but the CFPB requires two separate forms of contact. First, a servicer must make (or attempt) “live contact” with a borrower by their 36th day of delinquency.[7] Next, by the borrower’s 45th day of delinquency, a servicer must make (or attempt) written contact with borrower.[8] Notably, HBOR requires a post-NOD notice,[9] where the CFPB does not. While most California foreclosures are non-judicial, the CFPB rules also apply to judicial foreclosures in California, while HBOR does not.

A significant drawback of the NMS the absence of a private right of action. Citing violations may be helpful in terms of demand letters, but the NMS rules will not aid advocates bringing causes of action. The chart includes these rules mainly to give advocates the opportunity to assess potential HBOR liability for NMS signatories that want to take advantage of the safe harbor.

Summaries of Recent Cases

Published State Cases

FHA Loans: Borrowers May Bring Post-Sale, Equitable Claims on Breach of Contract Theory; Inequitable Exception to Tender Rule; Foreclosing is not “Debt Collection” under FDCPA

Fonteno v. Wells Fargo Bank, __ Cal. App. 4th __, 2014 WL 4058867 (Aug. 18, 2014): Deeds of trust in FHA-insured mortgages incorporate by reference HUD servicing requirements servicers must comply with before initiating foreclosure. One of those requirements is a face-to-face meeting between borrower and servicer. Without this meeting (or attempt to make contact) the lender is prevented from initiating foreclosure proceedings. 24 C.F.R. § 203.604. In Pfeifer v. Countrywide Home Loans, 211 Cal. App. 4th 1250 (2012), the Court of Appeal held borrowers may use violations of FHA requirements defensively to bring equitable, pre-foreclosure claims. Here, borrowers brought equitable claims to unwind a completed foreclosure sale based on servicer’s failure to comply with the face-to-face meeting requirement and resulting DOT breach. The Court of Appeal extended its holding in Pfeifer (or “clarif[ied]” it) to apply to all equitable claims, both pre- and post-foreclosure, as opposed to claims for damages. Borrowers, then, may use FHA violations defensively, as a shield to prevent or unwind a foreclosure sale; they may not use FHA violations affirmatively, as a sword to recover damages.

Borrowers bringing equitable claims to prevent or unwind foreclosure sales must tender the amount due on their loan. There are several exceptions to this rule, including where the allegations, if true, would render the foreclosure sale void (as opposed to voidable), or when it would be inequitable to require tender. Here, the court did not reach the question of whether this foreclosure was potentially void or voidable, focusing instead on the inequitable exception. As the court held in Pfeifer, it would be inequitable to require tender where the circumstances being litigated—servicer’s failure to provide a face-to-face meeting to discuss foreclosure alternatives—show that borrowers are unable to tender the amount due on their loan. They would not need the face-to-face meeting otherwise. “To require [borrowers] not to make . . . tender in order to obtain cancellation of a sale allegedly conducted in disregard of this [meeting] condition precedent and without any legal authority is inequitable under the circumstances.” The Court of Appeal reversed the trial court’s grant of servicer’s demurrer to borrower’s wrongful foreclosure and quiet title causes of action.

The FDCPA defines “debt collector” as: 1) “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts;” 2) or any person “who regularly collects or attempts to collect, directly or indirectly, debts owed . . . or due another.” This Court previously held (in Pfeifer) that the act of foreclosure, alone, does not constitute “debt collection” under the FDCPA. Here, borrowers alleged the foreclosing trustee was a “debt collector” because its “principal business” was the collection of debt through nonjudicial foreclosure. Additionally, trustee’s NOD indicated it “may be acting as a Debt Collector attempting to collect a debt.” The Court of Appeal allowed that this statement contemplates the possibility trustee was a debt collector, but refused to characterize trustee as such without allegations that trustee did more than conduct a nonjudicial foreclosure (like attempt to collect mortgage payments). That trustee served borrowers this NOD before being properly substituted in as trustee bears no weight on its status (or non-status) as a “debt collector” under the FDCPA. The court affirmed the trial court’s grant of trustee’s demurrer to borrowers’ FDCPA claim.

Negligence: Servicer Owes Borrower a Duty of Care if Servicer Chooses to Undertake Loan Modification Process

Alvarez v. BAC Home Loans Servicing, 228 Cal. App. 4th 941 (2014): Negligence claims require a duty of care owed from servicer to borrower. Generally, banks owe no duty to borrowers within a typical lender-borrower relationship. Many courts use the Biankaja test to determine whether a duty of care existed between a financial institution and borrower. Here, servicer agreed to consider borrower’s loan modification application. Servicer did not review the application in a timely manner, or use the proper income information provided by borrowers. While still reviewing the application, servicer foreclosed on borrower’s property. The Court of Appeal found the six Biankaja factors met. Servicer’s agreement to review the application was “intended to affect the [borrowers],” for it would impact their ability to keep their homes. Second, it was foreseeable that servicer’s bungling of the application could significantly harm borrowers. Third, injury was certain: while a loan modification was not guaranteed, borrowers lost the opportunity to modify and the house was sold, resulting in damaged credit, costs associated with trying to prevent foreclosure, and increased tax liability. Fourth, there was a close connection between servicer’s negligent handling of the application and the harm incurred—but for the negligence, borrowers could have qualified for a modification. “Should [borrowers] fail to prove that they would have obtained a loan modification absent [servicer’s] negligence, damages will be affected accordingly, but not necessarily eliminated.” Fifth, borrowers’ “lack of bargaining power” in the servicing process, “coupled with conflicts of interest that exist in the modern loan servicing industry,” impose a duty of care on servicers, who exercise complete control over the modification process and may be financially incentivized to mishandle it. Servicer’s dual tracking, a practice now prohibited, also increases its moral blameworthiness. Finally, public policy is served in preventing future dual tracking. The court notes that while HBOR was not effective during servicer’s alleged negligence, its passage “sets forth policy considerations” that contribute to a duty of care (quoting Jolley). Having found all six Biankaja factors fulfilled, the court reversed the trial court’s grant of servicer’s demurrer to borrowers’ negligence claim. Importantly, the court noted servicers are under no duty to modify a loan or to engage in the modification process. Once they agree to engage in that process, however, a duty of care arises.

Rejection of Glaski; Prejudice Required in Wrongful Foreclosure Claims; Defaulting Borrowers Lack Standing to Pursue Robo-Signing Claims

Mendoza v. JP Morgan Chase Bank, N.A., 228 Cal. App. 4th 1020 (2014): In general, California borrowers lack standing to allege violations of pooling and servicing agreements (PSAs), contracts between their lender and a third party trust. Here, borrower claims her loan was improperly assigned to a trust (securitized) because servicer attempted the assignment after the trust had already closed, violating the trust’s own PSA. The court considered Glaski v. Bank of Am., N.A., 218 Cal. App. 4th 1079 (2013), a recent California Court of Appeal case that did grant borrower standing to challenge a foreclosure based on a similar PSA violation and New York trust law. This court disagreed with Glaski’s standing analysis: “[w]e can find no state or federal cases to support the Glaski analysis and will follow the federal lead in rejecting this minority holding.” Even if the loan was actually assigned to the trust late, in violation of the PSA, and even if borrower presented specific evidence demonstrating this violation, nothing in California’s nonjudicial foreclosure statutory framework allows a borrower to challenge a foreclosure based on a “glitch in an attempted securitization.” The securitization of borrower’s loan —botched or not—“did not deprive the beneficiary of the deed of trust of the legal right to foreclose.”

To state a valid wrongful foreclosure claim, a borrower must show that the problems in the foreclosure process that made it “wrongful” prejudiced borrower in some way, specifically, in their ability to pay their mortgage. A borrower can also demonstrate prejudice by showing “that the original lender would not have foreclosed under the circumstances.” If the proper party could have foreclosed, in other words, the borrower cannot sue the improper party who actually foreclosed, if foreclosure was warranted because of borrower’s default. And simply pointing to irregularities in the foreclosure process does not allege prejudice. Here, borrower alleged the failed assignment to the trust voided the assignment, robbing the foreclosing party of the authority to foreclose and rendering the foreclosure itself void. This fails to allege prejudice. Borrower defaulted on her loan and did not demonstrate how the voided assignment prevented her from paying her mortgage. Notably, the Glaski court did not address prejudice at all. The Court of Appeal affirmed the trial court’s grant of servicer’s demurrer and published its decision.

Many federal cases have held: “where a [borrower] alleges that a document is void due to robo-signing, yet does not contest the validity of the underlying debt, and is not a party to the assignment, the [borrower] does not have standing to contest the alleged fraudulent transfer.” Here, borrowers alleged that two assignments of their loan were robo-signed by employees who either did not work for the entity listed in the assignment, or who held different titles than those listed in the assignment. The Court of Appeal agreed with the lower court and the many federal courts that have found robo-signing claims unavailing. First, borrowers did not allege that the employees actually lacked authorization to sign the assignments. Second, borrowers made no allegations that the financial institutions in question did not eventually ratify their employee’s (or their non-employee’s) signatures. Most critically, as non-parties to the assignments, borrowers lack standing to challenge the propriety of those assignments. Finally, borrowers have not alleged how any robo-signing, even if true, affected their ability to pay their mortgage. The robo-signing did not harm them in any way. The Court of Appeal granted servicer’s demurrer on borrowers’ robo-signing claim; this constitutes the first published Court of Appeal opinion on this issue.

Unpublished & Trial Court Decisions[1]

California Supreme Court Grants Review of Yvanova

Yvanova v. New Century Mortg., 226 Cal. App. 4th 495 (2014), depublished and review granted, __ P.3d __, 2014 WL 4233383 (Cal. Aug. 27, 2014) (No. S218973). In general, California borrowers do not have standing to allege violations of pooling and servicing agreements (PSAs), contracts between their lender and a third party trust. Here, borrower cited Glaski v. Bank of Am., N.A., 218 Cal. App. 4th 1079 (2013), a California Court of Appeal case that did grant borrower standing to challenge a foreclosure based on PSA violations and New York trust law. Borrower alleged that the assignment to the trust and the substitution of trustee were both backdated, in violation of trust rules, and therefore void. The Court of Appeal affirmed the trial court’s grant of defendants’ demurrer, explicitly rejecting Glaski. Without really analyzing Glaski, the court chose to follow Jenkins v. JP Morgan Chase Bank, N.A., 216 Cal. App. 4th 497 (2013), a pre-Glaski case that denied borrower standing to challenge the PSA. Following Jenkins, the Court of Appeal reasoned that botched assignments or substitutions are not the borrower’s problem: they do not affect the borrower’s obligation to pay their mortgage. If any entity is harmed and deserves a chance to challenge a PSA, it would be the “true” owner of the loan, who should have had the right to foreclose, but was deprived of it by the improper assignment. The Court of Appeal opinion was published, but the California Supreme Court recently granted borrower’s petition for review, asking: “In an action for wrongful foreclosure on a deed of trust securing a home loan, does the borrower have standing to challenge an assignment of the note and deed of trust on the basis of defects allegedly rendering the assignment void?” The grant of review supersedes the Court of Appeal opinion, which is no longer published or citable.

Servicer Denies Permanent FHA-HAMP Mod Based on Borrower’s Failure to Obtain HUD Signature: Valid Breach of Contract, UCL Claims

Mikesell v. Wells Fargo Bank N.A., No. 34-2014-00160603-CU-OR-GDS (Cal. Super. Ct. Sacramento Cnty. Aug. 21, 2014): Promissory estoppel claims can substitute for breach of contract claims in certain circumstances, when consideration is absent. Here, servicer offered borrowers a FHA-HAMP TPP agreement and accepted borrowers’ timely payments. At the conclusion of the TPP period, servicer demanded borrowers obtain a HUD signature to a Subordination Agreement. HUD, in turn, would only sign if the agreement came directly from servicer. Without HUD’s signature, servicer never permanently modified borrowers’ loan. Borrowers brought both breach of contract and promissory estoppel claims based on these facts. Because the TPP amounted to a bargained for exchange—an agreement to permanently modify in exchange for borrowers’ compliance and TPP payments—it must be pled as a breach of contract claim. The court granted servicer’s demurrer to the promissory estoppel claim; servicer did not demurrer to borrowers’ contract claim.

Under California’s Unfair Competition Law (UCL), a plaintiff must demonstrate an injury in fact (lost money or property) caused by the unfair competition. Here, borrowers alleged servicer’s TPP offer, (and their acceptance) led to their continued payment (the TPP installments) which they would not have otherwise made. This continuation of the modification process resulted in “overcharges and penalties” that would not have accrued without the TPP. This constitutes injury in fact and grants borrowers UCL standing.

Borrower Defeats Summary Judgment Motion: Document Submission Requirements in HAMP TPPs

Neep v. Bank of Am., N.A., No. 34-2013-00152543-CU-OR-GDS (Cal. Super. Ct. Sacramento Cnty. Aug. 18, 2014): Under the federal HAMP program, borrowers who successfully complete Trial Period Plans (TPPs) must receive a permanent modification offer from their servicer. Successful TPP completion requires a borrower to make timely, modified mortgage payments, but also to submit all documents requested by their servicer. Here, borrower completed his TPP but servicer refused to permanently modify his loan citing borrower’s failure to provide requested tax information. Specifically, servicer sent borrower notices that he must submit tax information “IF [borrower] was self-employed.” Borrower repeatedly told servicer that he was not self-employed but servicer continued to request the unnecessary tax documentation. Servicer moved for summary judgment and adjudication, arguing borrower’s failure to submit the required documentation was undisputed. The court, however, distinguished between a failure to submit documentation, and whether those documents were actually missing from borrower’s application. A servicer representative submitted a declaration asserting servicer mailed borrower letters requesting the tax information. But servicer presented no evidence that any documentation was actually missing from borrower’s file. It therefore failed to show that borrower had not complied with TPP requirements. Additionally, even if servicer had supplied admissible evidence on this point, borrower presented evidence to the contrary, asserting that this documentation was not required and that he complied with all TPP requirements. Triable issues of material fact are inappropriate for summary judgment, so the court denied servicer’s motion.

Viable Deceit Claim; Duty of Care Standard under Lueras; Promise & Damages under PE Claim; Transferee Liability; Pre-NOD Outreach Claim

Schubert v. Bank of Am., N.A., No. 34-2013-00148898-CU-OR-GDS (Cal. Super. Ct. Sacramento Cnty. Aug. 11, 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. Here, borrowers alleged their SPOC misrepresented that the impending foreclosure sale could not be postponed within five days of its scheduled date. The SPOC knew, however, that the sale could be postponed at any time, as it eventually was. Borrowers further pled this misrepresentation was made to induce borrowers not to fight the seemingly inevitable sale, thereby allowing servicer to sell their home during their loan modification review. The court found this a valid deceit claim and denied servicer’s demurrer.

Negligence claims require servicers to owe borrowers a duty of care, and damages. Within the context of a traditional borrower-lender relationship, banks generally do not owe a duty to borrowers. 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 misrepresented that a pending foreclosure sale could not be postponed, and then postponed it. Borrowers’ damages included ruined credit, extra penalties and fees, arrearages that would not have accrued if borrowers had more aggressively pursued their short sale, and the time and expense associated with pursuing a modification. The court found these allegations sufficient to state a “negligence/negligent misrepresentation” claim. That borrower’s damaged credit resulted from their bankruptcy, and not servicer’s misrepresentation, does not discount borrower’s other alleged damages. The court allowed the claim to survive.

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. Here, borrowers alleged servicer promised that if they halted their short sale efforts and instead entered into loan modification negotiations, they could continue to pursue a short sale if the modification was denied. Servicer subsequently denied borrower’s modification and refused to allow borrowers to conduct a short sale. Servicer argued that because borrowers had failed to allege their short sale proposal would have been approved, they failed to state a valid PE claim. That, however, was not the promise at issue. Rather, servicer promised, and ultimately failed to allow, borrowers to even pursue a short sale. The court found servicer made a clear promise, which it then breached. Additionally, the court found sufficiently pled damages. Again, servicer misstated the actual damages borrowers sought, which were accrued fees and penalties resulting from a prolonged foreclosure process, which would have been truncated, had borrowers been allowed to short sell their home. Servicer incorrectly argued that damages from a short sale are “too speculative,” and that because short sales by definition admit zero equity, damages are unavailable. Servicer’s demurrer to borrower’s PE claim was denied.

Servicing rights are often transferred from one servicer to another, without input or approval from borrowers. Servicers, however, are mere agents of the loan’s beneficiary. Here, borrowers’ loan was originally serviced by Bank of America, which promised to allow short sale negotiations if borrowers’ modification fell through. Bank of America subsequently sold its servicing rights to Nationstar, which did not rectify Bank of America’s failure to adhere to its promise. Borrowers therefore brought their PE claim (above) against both Bank of America and Nationstar. Borrowers convinced the court that Nationstar was equally liable for Bank of America’s promise: “‘although [BOA] is no longer the purported servicer of the Loan, [BOA] acted on behalf of Beneficiary and Beneficiary is responsible for the promises made by [BOA]. As such, enforcement of the promise can be demanded against Nationstar, the new . . . servicer.’” Nationstar, in other words, bought not just Bank of America’s servicing rights, but its liabilities. The court rejected Nationstar’s demurrer to borrowers’ PE claim.

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. Here, borrowers alleged servicer failed to contact them to discuss foreclosure alternatives at least 30 days before the NOD was recorded. Borrowers, though, admittedly submitted a modification application before servicer recorded the NOD. Servicer even requested follow-up documentation to this application. The court found this contact insufficient to defeat borrowers’ claim: while servicer may have contacted borrowers prior to recording the NOD, it allegedly failed to discuss the exact topics required by the pre-NOD outreach statute. Defendant’s demurrer was overruled.

“Complete” Mod Application & Duplicative Document Requests

Velez v. JP Morgan Chase Bank, N.A., No. 34-2013-00149821-CU-OR-GDS (Cal. Super. Ct. Sacramento Cnty. July 28, 2014): Servicers may not move forward with foreclosure while a borrower’s complete, first lien loan modification is pending. An “application shall be deemed ‘complete’ when a borrower has supplied the mortgage servicer with all documents required by the mortgage servicer within the reasonable timeframes specified by the mortgage servicer.” CC § 2923.6(h). Here, borrower alleged he submitted several complete applications, and each time, servicer would request duplicative documents. Servicer then recorded an NTS while at least one of these complete applications was still pending. One day later, servicer solicited another application from borrower, claiming that, because this application was not complete until weeks later, when borrower submitted additional documents, a complete application was not pending when servicer recorded the NTS. The court rejected this argument. Borrower clearly alleged he had submitted at least one complete application which was still pending prior to servicer’s recording of the NTS. Servicer’s claim that borrower’s pre-NTS applications were incomplete is contested by borrower, who alleges servicer merely requested duplicative information. “Whether the application was actually complete within the meaning of the statutes is a factual question no appropriately resolved on demurrer.” The court denied servicer’s demurrer.

Federal Cases

California’s Four-Year SOL Barred Proof of Claim Despite Note’s Election of Ohio Law

In re Sterba, __ B.R. __, 2014 WL 4219481 (B.A.P. 9th Cir. Aug. 27, 2014): In bankruptcy proceedings, federal choice of law rules apply rather than state law rules. Here, debtors defaulted on their mortgage loans in 2008, and the senior lienholder completed a nonjudicial foreclosure in 2009, wiping out the junior lien, a second mortgage on debtor’s California property, but made by an Ohio-based bank. The debtors filed their bankruptcy in 2013, and the junior lienholder filed a proof of claim in April 2013. The debtors objected, arguing that California’s four-year statute of limitations barred the claim. Applying California choice of law rules, the bankruptcy court overruled the objection on the ground that Ohio’s six-year statute of limitation applied because California choice of law rules honors the election of Ohio law in the Note. The Bankruptcy Appellate Panel disagreed, holding that the bankruptcy court erred in applying California choice of law rules rather than federal choice of law rules. Under federal choice of law rules, a standard, contractual, choice of law provision does not cover choice of law questions involving statutes of limitations: SOLs are procedural in nature and therefore controlled by the forum state’s laws. Here, that meant California’s four-year statute of limitations controlled and the court reversed the bankruptcy court’s order overruling debtor’s objection to the junior lienholder’s proof of claim.


Loan Origination & Servicing Claims: Delayed Discovery Rule, Fraud & Negligent Misrepresentation, Breach of Covenant of Good Faith and Fair Dealing, Pre-NOD Outreach

Castillo v. Bank of Am., 2014 WL 4290703 (N.D. Cal. Aug. 29, 2014): All claims must be filed within each claim’s statute of limitation, unless the plaintiff adequately alleges delayed discovery of the facts constituting the claim. Here, borrower brought many common law and contract based claims rooted in loan origination conduct, all of which occurred eight years before borrower brought suit and well outside the SOL for any of his claims. Basically, he alleged he was fraudulently induced into entering a higher cost loan by lender’s representative, who misstated borrower’s income and misrepresented Association of Community Organization for Reform Now (ACORN’s) down payment assistance. The court agreed with borrower that the SOLs tolled because of the delayed discovery rule. First, borrower adequately alleged he never received the loan documents, despite requesting them from the lender multiple times. Second, the loan documents were not in borrower’s native language. Third, servicer only provided borrower with payment coupons (as opposed to mortgage statements) that did not disclose the loan balance. The court held that borrower had adequately shown that, “despite his reasonably diligent efforts to discover” problems with the loan, those problems only became apparent when he received the NOD. The court refused to dismiss borrower’s claims based on servicer’s SOL argument.

To plead a cause of action for fraud, borrowers must allege: 1) misrepresentation of a material fact; 2) knowledge of falsity (or scienter); 3) intent to defraud; 4) justifiable reliance on the misrepresentation; and 5) resulting damage. A negligent misrepresentation claim requires the same elements, except that the statement need only be made “without reasonable grounds for believing it to be true,” rather than knowledge of its falsity. Here, borrower alleged lender’s representative fraudulently inflated borrower’s income and misstated ACORN’s coverage of three-percent of borrower’s down payment in order to qualify borrower for his loan. The court found borrower’s allegations an adequately pled fraud claim. Borrower’s allegation that lender promised not to report borrower’s missing payments to credit reporting agencies during modification negotiations –and lender’s subsequent reporting of those missing payments—also stated valid fraud and misrepresentation claims. Borrower sufficiently alleged he justifiably relied of lender’s assurances during the origination process because the loan documents were not in his native language, he was rushed and pressured into signing them, and because lender never provided him copies despite repeated requests. In addition, allegations of ruined credit, overcharges and fees, attorneys’ fees and costs, and initiation of foreclosure proceedings sufficiently satisfy the damages element. The court denied servicer’s motion to dismiss borrower’s fraud and negligent misrepresentation claims.

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 state a claim, borrowers must show: 1) a contract; 2) borrower’s performance, or excused nonperformance; 3) servicer’s unfair interference with borrower’s right to receive the benefits of the contract; and 4) damages caused by servicer’s breach. Here, borrower alleged servicer interfered with his ability to realize benefits under the DOT by representing that if borrower missed mortgage payments, this would “assist” him in the modification process. Servicer interfered with borrower’s ability to pay his loan, in other words. The court agreed and found these allegations sufficient to state a claim for breach of the covenant of good faith and fair dealing.

Servicers may not file an NOD until 30 days after contacting the borrower in person or by telephone to assess the borrower’s financial situation and explore foreclosure alternatives. Among other things, servicers must inform borrowers of their right to request a face-to-face meeting with a servicer representative. CC § 2923.55. Here, servicer argued borrower’s multiple meetings with servicer representatives discussing his modification eligibility met servicer’s pre-NOD outreach obligations. The court disagreed, citing borrower’s allegations that servicer did not contact him at least 30 days before recording the NOD and failed to inform him of his meeting rights. Borrower also disputed that the conversations explored foreclosure alternatives. The court denied servicer’s motion to dismiss.

Breach of DOT: Servicer Failed to Provide Pre-Acceleration Notice

Contreras v. JP Morgan Chase, 2014 WL 4247732 (C.D. Cal. Aug. 28, 2014): Breach of contract claims require borrowers to show the existence of an enforceable contract, borrower’s performance or excused non-performance, servicer’s breach, and damages. Here, borrower alleged servicer breached borrower’s DOT, which required the lender to provide written notice to the borrower of the following, before accelerating the loan:

(a) the default; (b) the action required to cure the default; (c) a date, not less than 30 days from the date the notice is given to Borrower, by which the default must be cured; and (d) that failure to cure the default on or before the date specified in the notice may result in acceleration of the sums secured by this Security Instrument and sale of the Property.

Borrower received no such pre-acceleration notice before servicer accelerated the loan and began foreclosure proceedings. Servicer argued borrower’s own non-performance (defaulting on his loan) defeated his breach of contract claim. The court rejected this argument, stating that “default alone [did] not excuse [servicer’s] obligation to mail the required notices. To find otherwise would be an unjust result as ‘any default by a [borrower] would allow the . . . [lender] to foreclose without any notice to the [borrower] regardless of the foreclosure procedures delineated in the mortgage documents.’” Further, the DOT itself imposes these notice requirements on the lender precisely in cases when the borrower is in default. The court denied servicer’s MTD borrower’s breach of contact claim.

Reinstatement Claim Requires Payment of Arrearages; Specific Allegation of Timely Modification Submission Not Required to State CC 2923.6 Claim; Servicer Owes Duty of Care to Process Completed Loan Modification Application

Penermon v. Wells Fargo Home Mortg., 2014 WL 4273268 (N.D. Cal. Aug. 28, 2014):[1] California nonjudicial foreclosure procedures dictate how borrowers may reinstate their loans and avoid foreclosure. CC 2924c governs this process and requires servicers to list the correct arrearage amount on the NOD, so borrowers know exactly how much they need to pay to reinstate their loan. Here, borrower alleged servicer misstated the amount due in the NOD, interfering with her ability to reinstate and violating CC 2924c. The court found that to bring such a claim, borrower must pay the arrearage, which differs from requiring her to tender the full balance of the loan. Because borrower did not allege her ability to pay the arrearage, the court dismissed her claim. It allowed, however, that these allegations should be asserted as part of borrower’s CC 2924.17 claim, which requires servicers to ensure the accuracy of defaults before recording NODs.

A servicer may not move forward with the foreclosure process while borrower’s first lien loan modification application is pending. HBOR does not specify a deadline, allowing borrowers to submit complete applications at any point before a sale and receive dual tracking protection. Here, borrower alleged she submitted her complete application “in or around April 2013,” less than one month after receiving a list of missing documents from servicer. Servicer argued borrower’s dual tracking claim fails because she did not specifically plead a submission date or whether her submission met servicer’s internal deadline. The court disagreed and found borrower’s allegation that she submitted a complete application within one month servicer’s document request sufficient. The court denied servicer’s MTD borrower’s CC 2923.6 claim.

Negligence claims require a duty of care owed from servicer to borrower. Generally, banks owe no duty to borrowers within a typical lender-borrower relationship. Here, borrower alleged servicer elected to engage in modification negotiations with her. Consistent with the recent Alvarez decision summarized earlier in the newsletter, the court held that “once [servicer] provided [borrower] with the loan modification application and asked her to submit supporting documentation, it owed her a duty to process the completed application once it was submitted.” The court denied servicer’s MTD borrower’s negligence claim.


Limits of FCRA Preemption; Valid Contract Claims Based on Permanent Mod; Valid Negligent Misrepresentation Claim Based on Biankaja Factors 

Desser v. US Bank, 2014 WL 4258344 (C.D. Cal. Aug. 27, 2014): The Fair Credit Reporting Act (FCRA) governs what “furnishers” of credit information, including servicers, may report to credit rating agencies (CRAs). “No requirement or prohibition may be imposed under the laws of any State . . . with respect to any subject matter regulated under [the section paraphrased above] . . . relating to the responsibilities of persons who furnish information to consumer reporting agencies.” State claims, both statutory and common law, that seek damages related to a servicer’s furnishing of information to CRAs, then, are preempted by the FCRA. Here, borrower alleged servicer improperly reported her delinquency to CRAs while her permanent modification was in place. Borrower had a pending employment offer withdrawn when her prospective employer learned of her negative credit report. As part of her negligent and fraudulent misrepresentation claims, borrower alleged this lost employment opportunity among her damages, which also included wrongfully accrued interest, late charges, and the prospect of foreclosure. The court agreed with servicer that, to the extent borrower’s tort claims sought damages related to her lost employment opportunity, those claims are preempted by the FCRA. They are not preempted, however, as they relate to the other asserted damages, which were unrelated to credit reporting. Borrower’s breach of contract claims are also unaffected by FCRA preemption, which only prohibits claims brought under “legal duties ‘imposed under the laws of any State,’” not under contractual duties. Borrower may use contract claims to assert all her damages, even those related to the lost employment opportunity. The court only dismissed borrower’s misrepresentation claims as they relate to the employment damages.

To state a contract claim, borrowers must show, inter alia, a contract, servicer’s breach, and damages. Here, borrowers received a permanent modification offer and mailed the signed agreement to servicer. Servicer failed to respond to borrowers’ requests for a fully executed copy and claimed it never received borrowers’ executed copy. Borrowers then re-mailed the signed agreement to servicer, and were instructed by servicer representatives to refrain from making any payments while servicer addressed the situation. More than one year after contract formation, servicer sent borrowers a monthly statement that finally reflected the modified interest rate and monthly payments. The statement identified an arrearage, however, and servicer soon initiated foreclosure proceedings. The court found borrower’s “acceptance of the [permanent modification] Agreement . . . all that was required to create a contract,” despite explicit language that no modification would form without borrowers’ receipt of servicer’s signed copy. Citing Barroso and Corvello, the court rejected this language as unfairly imbuing servicer with complete control over contract formation. Having identified a valid contract, the court then found servicer’s refusal to acknowledge the modification for over a year a breach of that contract. Borrowers’ allegations that servicer also breached the contract by refusing to bring their loan current when it finally acknowledged the contract, however, failed. Under the contract terms, servicer was only required to bring borrowers’ loan current upon contract formation. Borrowers argued this part of the agreement was verbally modified when servicer representatives instructed borrowers to stop making payments, and their loan should have been brought current when servicer finally acknowledged the contract. Because such a modification to the agreement related to real property, it needed to be in writing to satisfy the statute of frauds. Any damages resulting from servicer’s verbal promises may not, therefore, be recovered under a breach of contract theory. On the initial breach, however, the court found borrowers to have adequately pled damages, including the interest that accrued during servicer’s protracted delay in recognizing the loan modification, resulting late payments, and the initiation of the foreclosure sale. The court declined to dismiss borrowers’ contract claim.

Some courts require borrowers to show their servicer owed them a duty of care to bring a negligent misrepresentation claim. Generally, banks owe no duty to borrowers within a typical lender-borrower relationship. Many courts use the Biankaja test to determine whether a duty of care existed between a financial institution and borrower. Here, servicer offered borrowers a permanent modification and then refused to acknowledge its existence until more than a year later. The court found five of the six Biankaja factors met. First, offering borrowers a permanent modification was intended to affect them, as it would allow them to avoid foreclosure. Second, it was foreseeable that servicer’s stalling could significantly harm borrowers because the growing arrearage led to foreclosure. Third, injury is certain: foreclosure proceedings have commenced, borrowers have accrued improper interest and late fees, and have lost an employment opportunity due to bad credit. Fourth, these harms derived directly from servicer’s misconduct. Fifth, public policy—as expressed in the federal HAMP program and “recent state-level reforms”—is served in preventing servicers from misleading borrowers into further default, as servicer representatives allegedly did here. The court declined to weigh-in on the sixth factor, the moral blameworthiness of servicer’s (in)action. The court found a duty of care and rejected servicer’s MTD borrower’s negligent misrepresentation claim.

National Banks Cannot Invoke HOLA Preemption to Defend Their Own Conduct

Kenery v. Wells Fargo, N.A., 2014 WL 4183274 (N.D. Cal. Aug. 22, 2014):[1] 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 state-law foreclosure claims (UCL, quiet title, and declaratory relief) against her servicer, a national bank. 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. This court acknowledged the “growing divide in the district courts’ treatment of this issue” and explored 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: claims arising from the federal savings association’s actions may be defended with HOLA, but claims arising from the bank’s conduct may not be defended with HOLA. This court found the third option the most logical. Notably, the court considered that servicer had not submitted “any evidence that it has subjected itself to OTS supervision with respect to [borrower’s] loan or any of the numerous other Wachovia loans it took over in the merger. The Court concludes that [servicer] may not avail itself of the benefits of HOLA without bearing the corresponding burdens.” To the extent that borrower’s claims, however vaguely, relate to the securitization of her loan—which happened under the federal savings association’s watch—those claims are preempted. But because borrower’s claims are most clearly rooted in servicer’s conduct, not the federal savings association’s conduct, her claims are not preempted by HOLA. The court ultimately dismissed borrower’s claims on non-preemption grounds.

Borrower’s Request for Loan Modification Triggers Servicer’s Obligation to Provide SPOC

McFarland v. JP Morgan Chase Bank, 2014 WL 4119399 (C.D. Cal. Aug. 21, 2014):[1] 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 alleged her servicer violated these requirements by transferring her between representatives, requiring her to re-fax modification documents over and over, and failing to provide her with the status of her modification. Servicer argued that because borrower failed to specifically request a SPOC, not just a foreclosure prevention alternative, servicer was under no duty to appoint a SPOC, according to a strict reading of the statute. The court disagreed, citing other courts that have rejected that argument, preferring instead a “plain reading” of the statute that only requires a borrower to request a foreclosure prevention alternative to be assigned a SPOC. The court then concluded that servicer representatives violated CC 2923.7, as none of the representatives, even if they were part of a “team,” duly performed their SPOC duties. The court denied servicer’s motion to dismiss borrower’s SPOC claim.

Court Withholds Judicial Notice of Disputed Tax Statement, Giving Rise to Viable CC 2954 Claim; UCL Relationship with Contract Claims

Rosell v. Wells Fargo Bank, 2014 WL 4063050 (N.D. Cal. Aug. 15, 2014): Judicial notice may be granted to at least the existence of certain foreclosure-related documents and government documents if they are not disputed and if they can be verified by public record. Fed. R. Ev. 201(b)(2). Here, borrowers pled a CC 2954 claim, which prohibits servicers from imposing escrow accounts except as allowed in specific circumstances, including where borrower failed to pay “two consecutive tax installments on the property.” Servicer asked the court to take judicial notice of borrower’s county tax statement, a public record from a government website. Servicer requested judicial notice of the statement’s existence, but also its veracity, to prove borrowers missed two consecutive property tax payments, rendering the servicer-imposed escrow account lawful. Since borrowers disputed that they had missed two consecutive property tax payments, the court declined to take judicial notice of the tax statement. Borrowers therefore stated a valid CC 2954 claim and the court denied servicer’s MTD on that issue.

There are three distinct prongs of a UCL claim: unlawful, unfair, and fraudulent. “A breach of contract claim may form the basis of a UCL claim but only if [borrower] alleges conduct that is unlawful, unfair or fraudulent independent of the breach.” In other words, a borrower may not bring a UCL claim simply by alleging that the contract breach itself was unfair. There must be another aspect of the breach (“a ‘plus’ factor”) that fulfills one of the UCL’s three prongs. Here, borrowers did not expand upon their breach of contract claim in a way that would constitute a separately actionable UCL violation. The court dismissed their UCL claim.

National Banks Cannot Invoke HOLA Preemption to Defend Their Own Conduct; HBOR’s “Owner Occupied” & “Principal Residence” Requirements; UCL Claim Allowed to Stand Based on Borrower’s Leave to Amend HBOR Claim

Corral v. Select Portfolio Servicing, Inc., 2014 WL 3900023 (N.D. Cal. Aug. 7, 2014): The Home Owners’ Loan Act (HOLA) and the (now defunct) Office of Thrift Supervision (OTS) governed lending and servicing practices of federal savings associations (FSAs). HOLA and OTS regulations occupied the field, preempting any state law that regulated lending and servicing of FSAs. Here, borrowers brought HBOR claims against their servicer, Select Portfolio Servicing (SPS), and US Bank, the owner of their loan and a national bank. SPS and US Bank argued they are entitled to assert HOLA preemption because the loan originated with an FSA, and that US Bank and SPS stepped into the FSA’s shoes, allowing them to employ a preemption defense that was meant only for FSAs. This court disagreed, adopting the growing view that any conduct occurring after the loan passed to a non-FSA is protected against a HOLA preemption defense. Here, the conduct at issue revolved around loan modification negotiations and foreclosure activity, conducted by SPS and occurring well after the FSA assigned borrowers’ loan to US Bank. The court therefore denied SPS’s MTD borrower’s HBOR claims based on preemption.[1]

For HBOR dual tracking claims, borrowers must plead that the subject property is “owner-occupied:” “property [that] is the principal residence of the borrower.” CC § 2924.15. Here, borrowers took out the subject

loan jointly, and brought suit as co-plaintiffs. While their complaint alleged that one of the borrowers was a “resident at the property,” it was silent on the residence of the other borrower, and did not assert that either borrower occupied the property as their principal residence. The court rejected servicer’s argument that each of the borrowers must allege both requirements: that the property is owner-occupied and their principal residence. “[I]t is enough for one Plaintiff to live at the Subject Property as her primary residence.” The court did dismiss their claim, however, with leave to amend to allege that at least one of the borrowers occupied the property as their principal residence.

There are three possible prongs within a UCL claim: unlawful, unfair, and fraudulent. The unlawful prong bases a UCL violation on another actionable claim. To bring a claim under any of these prongs, borrowers must assert injury in fact (loss of property or money) arising from servicer’s conduct. Here, the court dismissed borrower’s HBOR dual tracking claim, but with leave to amend. Even with this dismissal, however, the court allowed borrower’s UCL claim –based on servicer’s alleged HBOR violation—to stand. Additionally, the court accepted borrowers’ alleged damages caused by servicer’s HBOR violation: foreclosure initiation, damaged credit, and attorney costs. Because borrowers alleged “lost money” caused by servicer’s conduct, the court granted them UCL standing and refused to dismiss their UCL claim.


A National Bank Cannot Invoke HOLA Preemption to Defend its Own Conduct; Pleading Requirements for Subsequent Mod Applications; Valid SPOC Claim

Hixson v. Wells Fargo Bank, 2014 WL 3870004 (N.D. Cal. Aug. 6, 2014): The Home Owners’ Loan Act (HOLA) and the (now defunct) Office of Thrift Supervision (OTS) governed lending and servicing practices of federal savings associations (FSAs). HOLA and OTS regulations occupied the field, preempting any state law that regulated lending and servicing. 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. Here, borrower brought state HBOR claims against her servicer, a national bank. Borrower’s loan originated with a federal savings association, which then assigned the loan to Wachovia, which merged with Wells Fargo, a national bank. This court acknowledged that many district courts (including this court) have allowed Wells Fargo to invoke HOLA preemption if the subject loan originated with a federal savings bank, but pointed to the lack of analysis in these opinions. The court then opted to follow a growing view that only allows a national bank to invoke HOLA preemption to defend the conduct of the federal savings association. Any conduct occurring after the loan passed to the national bank is not subject to a HOLA preemption analysis. Here, the conduct at issue revolved around loan modification negotiations that occurred well after borrower’s loan was transferred to Wells Fargo. The court therefore rejected Wells Fargo’s HOLA preemption argument. The court also rejected Wells Fargo’s more specific arguments: first, borrower agreed to be bound by HOLA preemption when she signed the DOT. The court, however, found no language in the DOT that would indicate HOLA preemption applies to a non-FSA like Wells Fargo. The note and DOT simply invoke “applicable federal law,” not HOLA itself. Second, servicer argued that OTS opinion letters granted national banks the right to use HOLA preemption. The court found that was true, but only to defend against origination claims related to the FSA’s conduct. Having found Wells Fargo unable to use HOLA preemption as a defense to its own conduct, the court evaluated borrower’s claims on their merits.

Under HBOR, a servicer is not obligated to consider a borrower’s modification application if it considered a previous application. If a borrower can show she “documented” and “submitted” a “material change in financial circumstances” to servicer, however, dual tracking protections can reignite and protect the borrower while that subsequent application is pending. CC § 2923.6(g). Here, borrower’s previous applications were denied. She submitted a new application, however, after renting a room in her home and increasing her income. She submitted a new application to her servicer citing this material change in her financial circumstances. Servicer acknowledged the application in writing shortly before recording a NTS. The court found borrower adequately stated a dual tracking claim. That her complaint (not her application) omitted the amount of rent she was now collecting is unimportant at the pleading stage. Similarly, borrower’s failure to allege how servicer’s dual tracking violation was “material” is not required at the pleading stage. Both issues are questions of fact inappropriately resolved on a motion to dismiss. The court denied servicer’s MTD borrower’s dual tracking claim.

“Upon request from a borrower who requests a foreclosure prevention alternative, the mortgage servicer shall promptly establish a single point of contact and provide to the borrower one or more direct means of communication with the single point of contact.” CC § 2923.7. SPOCs may be a “team” of people, or an individual, and must facilitate the loan modification process and document collection, possess current information on the borrower’s loan and application, and have the authority to take action. Here, borrower alleged she was assigned eight SPOCs over five months, none of whom could provide her with any pertinent information about her loan or modification application. Some SPOCs were seemingly unaware of their status as her SPOC. The court considered servicer’s argument that borrower did not specifically request a SPOC (rather than a foreclosure prevention alternative) mooted because neither party disputed that SPOC(s) were assigned. Because none of the borrower’s SPOCs fulfilled their statutory duties, the court dismissed servicer’s MTD.


Advising Borrower against Reinstatement Falls Short of “Interference” in Good Faith & Fair Dealing Context; But Servicer May Still be Liable for Intentionally Interfering with DOT; Viable Fraud Claim

Fevinger v. Bank of Am., 2014 WL 3866077 (N.D. Cal. Aug. 4, 2014): 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 state a claim, borrowers must show: 1) a contract; 2) borrower’s performance, or excused nonperformance; 3) servicer’s unfair interference with borrower’s right to receive the benefits of the contract; and 4) damages caused by servicer’s breach. Here, borrower alleged her servicer prevented her from realizing the benefits under her DOT, specifically, her right to reinstate her loan. After a brief delinquency, borrower contacted servicer to determine her arrearage. In her pleadings, she alleged that her servicer both provided her with an inaccurate amount, and failed to provide any amount. “Given this irreconcilable inconsistency,” the court did not believe borrower’s assertion that no amount was ever provided. Further, borrower had actual knowledge of the arrearage, since the delinquency was short-lived and she knew the amount of her mortgage payments. And because her reinstatement right depended on her own “payment of all sums under agreement,” she failed to prove her own performance under the DOT, or any “cognizable excuse” for nonperformance. Even if she had fulfilled this requirement, this court held that “a lender’s inducement of a homeowner to stop making payments on a home mortgage loan through the promise of forestalling future foreclosure proceedings” is mere encouragement and does not amount to unfair interference with borrower’s right to benefit under the DOT. The court dismissed borrower’s good faith and fair dealing claim.

Interestingly, the same set of facts provided the basis for borrower’s viable intentional interference with a contract claim. To state a claim under this theory, a borrower must show: 1) a contract; 2) servicer (as a stranger to the contract) had knowledge of the contract; 3) servicer’s intentional inducement of a breach “or disruption” of the contract; 4) actual breach or disruption; and 5) damages. Here, borrower alleged servicer, as an outside party, intentionally interfered with borrower’s contract—the DOT—with her lender. After alleging servicer interfered with her ability to benefit from the DOT as part of her good faith and fair dealing claim, borrower then pled (in the alternative) that servicer, as a stranger to the DOT, interfered with that contract. And because “[i]nterference with an existing contract does not require wrongful conduct aside from the alleged interference in and of itself,” the court agreed that this was a viable claim and denied servicer’s MTD.

Fraud allegations require, inter alia: 1) a misrepresentation; 2) borrower’s justifiable reliance; and 3) damages. Justifiable reliance, in turn, requires actual and reasonable reliance. Borrower here cited several misrepresentations, all basically alleging “she was getting jerked around by [servicer],” as it promised not to foreclose while her applications were under review, and constantly requested duplicative, “lost” documents. Because borrower specifically pled servicer promised not to initiate foreclosure, as opposed to not selling borrower’s home, the court found her fraud claim viable. On the justifiable reliance element, “California courts have found reasonable reliance where the [servicer] allegedly misrepresented that it had not scheduled a trustee’s sale of the borrower’s home while the borrower was requesting a reevaluation of the [servicer’s] denial of a loan modification.” On actual reliance, borrower pled that, “but for [servicer’s multiple] misrepresentations, she would have” reinstated her loan. Finally, borrower adequately alleged damages including costs associated with saving her home, foreclosure initiation, overcharges, loss of reputation, credit damage, and various forms of emotional distress. The court denied servicer’s MTD borrower’s fraud claim.


Pre-NOD Outreach Requires Written Notice & Live Contact; Dual Tracking Applied to Multiple Applications; SPOC “Team” Must Perform SPOC Duties

Johnson v. SunTrust Mortg., 2014 WL 3845205 (C.D. Cal. Aug. 4, 2014): Generally, CC 2923.55 prevents servicers from initiating foreclosure until contacting, or diligently attempting to contact, a borrower to discuss foreclosure alternatives. Specifically, CC 2923.55(b)(1)(B) prevents servicers from recording an NOD before sending borrower written notice that borrower may request certain documents, including their promissory note, DOT or mortgage, and any applicable assignment. Further, under CC 2923.55(b)(2), a servicer is required to contact borrower by phone or in person to assess borrower’s financial situation and to discuss foreclosure alternatives. During this contact, a servicer must advise a borrower that they may request a meeting and must provide HUD contact information. Here, borrower alleged he never received the required written notice. Servicer argued that, like the statute that governs the mailing of NODs, this statute merely requires servicer to mail this notice, and says nothing about borrower’s actual receipt. The court disagreed and found the analogy to the NOD mailing statute inapplicable. The court did, however, agree with servicer that borrower failed to sufficiently allege violation of the live contact requirement, as he conceded that he had multiple discussions with servicer regarding his financial situation and loan modification options prior to servicer’s recording of the NOD. That servicer did not explicitly inform borrower he could request a face-to-face meeting, or provide HUD contact information, does not expose servicer to liability. Despite its specific language, CC 2923.55 “only ‘contemplates contact and some analysis of the borrower’s financial situation.’” The court denied servicer’s MTD borrower’s CC 2923.55 written notice claim, but granted it on borrower’s live contact claim.

Ordinarily, a servicer need only evaluate a borrower for a loan modification once. If a borrower submits documentation of a “material change” in their financial circumstances, however, HBOR’s dual tracking protections apply to that borrower’s new application. Dual tracking protections prevent servicers from recording an NOD, NTS, or conducting a foreclosure sale while a borrower’s complete, first lien loan modification application is pending. Servicers define what constitutes a “complete” application. Here, borrower submitted three loan modifications. After his first was denied, he submitted his second, which was still pending when servicer recorded an NOD and NTS. Servicer argued that dual tracking protections did not apply to this second application because it was incomplete, evidenced by servicer’s request for further documentation. The court somewhat agreed, noting the lack of clarity in the complaint: borrower alleged only that servicer “informed them that the application was incomplete–not that the application actually was incomplete.” Additionally, since this was borrower’s second application, he had to “submit” and “document” a material change in financial circumstances to take advantage of dual tracking protections. While borrower alleged this in regards to his third application, the complaint is silent on the second application. The court therefore dismissed borrower’s dual tracking claim on his second application without prejudice. If borrower can amend to allege a complete application showing a documented material change in financial circumstances, he may have a valid dual tracking claim. On borrower’s third application, servicer had already recorded the NOD and NTS before borrower submitted this application. It did not then cancel the scheduled sale. The court found that merely keeping a sale ‘scheduled’ does not violate CC 2923.6 and dismissed borrower’s dual tracking claim based on this third application.

HBOR requires servicers to provide borrowers with a “direct means of communication 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 alleged that servicer’s team of personnel failed to “timely, accurately, and adequately” inform him of the status of his applications, were unable to facilitate the loan modification process, and were often unreachable. Further, servicer never provided borrower with a “direct means to contact” anyone from his SPOC team. The court agreed borrower had stated a valid SPOC claim and denied servicer’s MTD.

Any Borrower Who Occupies the Property as their Principal Residence May Bring HBOR Claims

Agbowo v. Nationstar Mortg., 2014 WL 3837472 (N.D. Cal. Aug. 1, 2014): For HBOR dual tracking claims, borrowers must plead that the subject property is owner-occupied: “property [that] is the principal residence of the borrower.” CC § 2924.15. Here, two borrowers brought a dual tracking claim against their servicer. Each borrower is listed as such on the note and DOT, but only one borrower occupies the home as her principal residence. Servicer argued that because the statute specifies “the borrower,” rather than “a borrower,” or “any borrower,” each borrower listed in the DOT must occupy the home to take advantage of this HBOR provision. Servicer further warned that finding otherwise would lead to a rash of “absentee signator[ies] demanding SPOCs and suing to halt foreclosure sales as long as one signatory lived in the home. The court found otherwise: the language cited by servicer is at least ambiguous, and servicer’s interpretation is unsupported by any case law. Further, HBOR’s very purpose is to make sure borrowers are considered for foreclosure alternatives. The parade of horribles servicer envisions are not absurd at all, and actually contribute to this legislatively intended end. Further, nothing in HBOR requires a servicer to actually grant a modification that is unsigned by all borrowers; assigning SPOCs to all borrowers should be unaffected by borrowers’ varying locations; and servicers must reach out to borrowers to discuss foreclosure alternatives regardless of where borrowers live. The court denied servicer’s MTD borrower’s HBOR dual tracking claim.

CC 1717: Servicer Attorney’s Fees Unavailable if Borrower Voluntarily Dismisses COAs “on a Contract”

Massett v. Bank of Am., 2014 WL 3810364 (C.D. Cal. July 25, 2014):[1] CC 1717 allows for attorney’s fees in actions “on a contract.” In this limited, attorney’s fees context, California courts interpret “on a contract” liberally to include any action “involving a contract.” To recover attorney’s fees under this statute, the moving party must show: 1) the operative contract specifically allows attorney’s fees; 2) it has prevailed in the action; and 3) its request is reasonable. Importantly, there is no “prevailing party” if the borrower voluntarily dismisses their case. CC § 1717(b)(2). Here, borrowers brought dual tracking and fraud claims against their servicer, won a TRO, and engaged in “extended motion practice” before voluntarily dismissing their case. This court followed California precedent and found these claims to be “on a contract” because they essentially challenged servicer’s authority to foreclose under the DOT. The court therefore rejected servicer’s argument that the action included “non-contract” claims. Determining CC 1717 to be the operative statute, the court then reasoned that since borrowers voluntarily dismissed their case, servicer was not entitled to attorney’s fees. Even if the court had not found borrower’s claims to be “on a contract” and evaluated servicer’s request using only the attorney’s fees provision in the DOT, servicer would still be unsuccessful. “A Court may only award ‘off-contract’ fees under a contractual fee provision if that provision is expansive enough to actually cover those causes of action.” This DOT is narrow, only allowing attorney’s fees if there is a “legal proceeding that might significantly affect Lender’s interest in the Property and/or rights under [the DOT].” Because servicer’s interest and rights are “creatures of contract,” the DOT, and the DOT does not allow for “off-contract” fees, the court dismissed servicer’s motion for attorney’s fees. The court did, however, award servicer its costs. CC 1717 does not regulate non-attorney’s fee costs, so servicer was considered the “prevailing party” under the costs-awarding statutes (CC §§ 1032; 1033.5).

Recent Regulatory Updates

Consumer Financial Protection Bureau, Bulletin 2014-01 (Aug. 19, 2014)

“[D]ue to the continued high volume of servicing transfers,” the CFPB issued new compliance guidelines for servicers and sub-servicers. This guidance replaces CFPB Bulletin 2013-01 (Feb. 11, 2013).

Servicers are required to “maintain policies and procedures that are reasonably designed to achieve the objectives of facilitating the transfer of information during mortgage servicing transfers and of properly evaluating loss mitigation applications.” 12 C.F.R. § 1024.38(a), (b)(4). There is no private right of action to enforce this general requirement.

Specifically, RESPA requires transferor and transferee servicers to contact the borrower, in writing, 15 days prior to the servicing transfer (transferor’s responsibility) and within 15 days after the servicing transfer (transferee’s responsibility). Each written notice must include the date of transfer, contact information for each servicer, and the date the borrower should start making payments to the transferee servicer. See 12 C.F.R. § 1024.33(b)(1)-(4).

The transferor must transfer all documents and information related to borrower’s loan to the transferee servicer. Transferee has an obligation to identify and request (from the transferor) any missing documents. 12 C.F.R. § 1024.33(b)(4). Documents already submitted to the transferor servicer may qualify as a loss mitigation “application.” Official Bureau Interpretation, Supp. 1 to Part 1024, ¶ 41(i)-1.

This guidance provides examples demonstrating how servicers can accomplish the requirements listed above. There is also an FAQ section targeted directly at transferee servicers, addressing their responsibilities related to Requests for Information and Notices of Error, SPOCs, and loss mitigation. Advocates representing clients with servicing transfer problems should consult this extensive guidance.


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