Legal Update

THE SOLE REMEDY FOR A LENDER’S VIOLATION OF CIVIL CODE §2923.5 (FAILURE TO EXPLORE FORECLOSURE ALTERNATIVES) IS POSTPONEMENT OF THE FORECLOSURE SALE

  • August 17th, 2010
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The only remedy available to a homeowner for the lender’s violation of its statutory obligation to explore options to prevent foreclosure, is postponement of the impending foreclosure sale.  However, if the foreclosure sale has already occurred, the lender’s noncompliance does not affect the validity of the foreclosure sale.  Mabry v. Superior Court (2010) 185 CA4th 208.

FACTS: In December 2006, the Mabrys refinanced their home loan, borrowing $700,000 from Aurora.    According to Aurora, in July 2008 the Mabrys contacted Aurora by telephone to discuss options for avoiding foreclosure, including loan modification, short sale, deed-in-lieu of foreclosure, and a special forbearance.  Aurora alleges that an Aurora employee then sent a letter to the Mabrys following up on the conversation, explaining the various options and asking the Mabrys to send their financial information to Aurora.  The Mabrys then missed their August and September 2008 payments, and Aurora claims it sent another letter to the Mabrys describing options for avoiding foreclosure followed by numerous phone calls that were never answered by the Mabrys.

On June 18, 2009, Aurora recorded a notice of default.  According to the Mabrys, no one had ever contacted them about their foreclosure options.

The Mabrys filed a complaint in Orange County Superior Court arguing that Aurora failed to comply with California Civil Code §2923.5.  This new code section (enacted in 2008), requires a lender to contact the borrower in person or by phone to assess the borrower’s financial situation and explore options to prevent foreclosure before the lender may file a notice of default.  The lender may not record an notice of default until 30 days after the initial contact is made or 30 days after satisfying the due diligence requirements to contact the borrower.

The trial court ruled, that no private right of action existed under §2923.5, and that the Mabrys  were required to tender all arrearages before enjoining a foreclosure proceeding.  Six days before the rescheduled foreclosure sale date, the Mabrys filed a writ proceeding to the Court of Appeal.

DECISION: The Court of Appeal reversed the trial court’s judgment, holding that §2923.5 could be enforced by a private right of action, and that a borrower is not required to tender the full amount of mortgage indebtedness due as a prerequisite to bringing an action under §2923.5.  In its examination of the relevant Civil Code sections relating to the borrower’s right to be contacted by the lender prior to the recording of a notice of default, the court held that the sole remedy available for a lender’s noncompliance with §2923.5 is the postponement of the foreclosure sale until the lender complies with the statute.

However, if a foreclosure sale has already occurred and the property was sold to a new owner, the court ruled that the lender’s violation of §2923.5 would have no effect on the new owner’s title to the foreclosed property.  According to the court, there is nothing in section 2923.5 that even hints that noncompliance with the statute would cause any cloud on title after an otherwise properly conducted foreclosure sale. The court noted that under the plain language of section 2923.5 the only remedy provided is a postponement of the sale before it happens.

The court issued a writ instructing the trial court to decide whether Aurora complied with §2923.5 and then either permit the foreclosure to proceed if Aurora is found to have complied, or postpone the foreclosure until Aurora complies with §2923.5 and records a new notice of default.

ANALYSIS: If a notice of default has been recorded against a homeowner’s property and the lender has not contacted them in person or by telephone to assess the borrower’s financial situation and explore options to prevent foreclosure, the borrower has the right to sue the lender for violation of Civil Code §2923.5.  Suit must be filed and the sale stopped before the foreclosure sale takes place.  If the borrower waits until after the foreclosure sale has occurred, the sale will not be set aside by the court.