HOBR and 2924

28 Mar
55-DEC Orange County Law. 12
Orange County Lawyer
December, 2013
Judge Kirk H. Nakamuraa1
Copyright © 2013 by Orange County Bar Association; Judge Kirk H. Nakamura
Since 2008, there have been over 3.9 million foreclosures in the United States. Lois M. Jacobs & Heather E. Stern, Rights in Foreclosure: To Protect Homeowners Facing Foreclosure, the National Mortgage Settlement and Homeowner’s Bill of Rights Impose New Standards on Mortgage Servicers, Los Angeles Law., January 2013, at 24. In response to mortgage servicer improprieties in the rising number of foreclosures, the attorneys general of every state, except Oklahoma and the District of Columbia, served suit against the five major mortgage servicers. Id. at 24-25. As a consequence, these mortgage servicers agreed to enter into consent judgments known as the National Mortgage Settlement (NMS). Id. at 25. The NMS imposed new mortgage servicing requirements on these servicers. Id.
California became a pioneer in creating homeowner rights in foreclosures proceedings by creating new statutory provisions governing the non-judicial foreclosure process based on these requirements. Id. California extended the protections guaranteed by the NMS by also holding accountable servicers and lenders not bound by NMS. These new statutory provisions are collectively known as the California Homeowners Bill of Rights (H BOR). Enacted on January 1, 2013, the HBOR greatly expanded a borrower’s private right of action against servicer/lenders and imposed more stringent requirements upon servicer/lenders before and during the non-judicial foreclosure process.
General Principles of Non-Judicial Foreclosures
In California, lenders can choose to initiate either a judicial or a non-judicial foreclosure. Mark S. Pécheck & Kelsey M. Lestor, The ABCs of California Foreclosure Law, Los Angeles Law., January 2012, at 13. The non-judicial foreclosure process is cheaper and more expedited. Id. For these reasons, lenders tend to prefer this method. Id.
Non-judicial foreclosures are governed by statute. See Cal. Civ. Code §§ 29242924k. Under the statute, lenders are authorized to initiate the non-judicial foreclosure process pursuant to provisions of a Deed of Trust (DOT). A DOT is “a deed conveying title to real property to a trustee as security until the grantor repays a loan.” Black’s Law Dictionary (9th ed. 2009). If the borrower defaults, the trustee has the power to sell the property under a ““power of sale” clause within the DOT. Pécheck & Lestor, supra at 13. Once the borrower defaults, lenders commence the non-judicial foreclosure process with the service of a Notice of Default (NOD). Moeller v. Lien, 25 Cal. App. 4th 822, 830 (1994). Once a NOD is served, the trustee must wait at least three months before proceeding with the sale. Id, “After the [minimum] three-month period has elapsed, a Notice of Sale must be published, posted, and mailed 20 days before the sale and recorded 14 days before the sale.” Id. On the day of the sale, the trustee will sell the property by auction to the highest bidder. Pécheck & Lestor, supra at 14. Once the sale is completed, a Trustee’s Deed Upon Sale is recorded, transferring title to the winning bidder. Id.
Prior to January 1, 2013, the statutes governing non-judicial foreclosures imposed certain requirements upon lenders before they recorded a NOD through the point of sale. In comparison to HBOR, these previous statutory requirements were minimal.
Non-Judicial Foreclosures Prior to HBOR (a) Servicer Requirements Before NOD Is Served
Prior to recording a NOD, lenders were required to contact the borrower to discuss his/her financial situation and options to avoid foreclosure. Cal. Civ. Code § 2923.5(a) (2). During this initial contact, the lender was required to advise the borrower that he or she had a right to request a second meeting. Id. In either meeting, the lender was to provide the borrower with a toll-free telephone number that would lead to a Department of Housing 1 and Urban Development (HUD)-certified housing counseling agency. Id. Lenders were required to make this initial contact in compliance with the “due diligence” standards set forth in Cal. Civ. Code section 2923.5(g). Due diligence requirements included, but were not limited to, sending the borrower a first-class letter with a toll-free number to find a HUD-cerufied counseling agency, attempting to *13 contact the borrower three different times on different days, and sending a certified letter with return receipt to the borrower. Id. After thirty days following the initial contact or thirty days following the satisfaction of the due diligence requirements, lenders were permitted to record a NOD. Cal. Civ. Code § 2923.5(a)(1).
(b) Post-NOD Servicer Requirements
Once a lender serves a NOD, at least three months must elapse before the trustee gives notice of sale. Cal. Civ. Code § 2924(a)(2). During these three months, borrowers can cure the default and “reinstate” the loan by bringing all payments current and paying all costs and fees to date of the lender and trustee. Pécheck & Lestor, supra at 14. If the default is not cured, a lender is allowed to file a Notice of Sale (NOS) up to five days before the lapse of the three-month period as long as the sale date occurs after three months and twenty days following the serving of the NOD. Cal. Civ. Code § 2924(a)(4). The sale can be postponed orally at any time on the day of the sale as long as a bid had not been accepted. Cal. Civ. Code § 2924(g). On the day of the sale, the trustee will sell the property by auction to the highest bidder and, upon the recordation of a Trustee’s Deed Upon Sale, title is transferred to the winner. Pécheck & Lestor, supra at 14.
Limited Homeowner Rights of Action Prior
Before January 1, 2013, borrowers had limited rights to seek legal recourse against lenders for statutory violations in wrongful foreclosure proceedings. Additionally, there were few non-statutory based legal theories pursued by homeowners against servicers which courts found to be viable.
Courts have generally found there to be no private right of action for servicer’s statutory violations of the non-judicial foreclosure process. Courts have rejected causes of action for violations of both Civil Code § 2923.52 and § 2923.53, which provide for a ninety-day delay in the foreclosure process unless the lender had in place a qualified loan modification program. Vuki v. Superior Court, 189 Cal. App. 4th 791, 799-800 (2010). The Vuki court reasoned that because the statutory language for these subsections had a regulatory structure, the legislature intended that there be regulatory agency enforcement of such violations as opposed to enforcement by private lawsuits for damages Id. But cf. Mabry v. Superior Court, 185 Cal. App. 4th 208 (2010). Similarly, a court held that no private right of action existed for violations *14 of Civil Code § 2923.6, which the court held only “merely expresses the hope that lenders will offer loan modifications on certain terms. See Rodriguez v. JP Morgan Chase & Co., 809 F. Supp. 2d 1291, 1296 (2011). Morover, a borrower could not bring a judicial action testing whether the entity initiating the foreclosure has the authority to do so (wrongful initiation of the foreclosure process) under Civil Code § 2924(a), which provides that “a trustee, mortgagee, or beneficiary or any of their agents may iniriate the foreclosure process” since the statute does not expressly permit such action. The court reasoned that allowing such lawsuits would delay the nonjudicial foreclosure process, which the legislature intended to be a “quick, inexpensive, and efficient” process. Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149, 1155(2011).
Similarly, borrowers were generally not successful in pursuing non-statutory common law based actions against lenders. Courts held that a homeowner does not have the right to bring a judicial action to set aside a foreclosure sale based on miscommunications and the original lender. Nguyen v. Calhoun, 105 Cal. App. 4th 428, 445-46 (2003) (holding that the miscommunication does not constitute an irregularity in the foreclosure proceeding itself, which is required to warrant the invalidation of the trustee’s sale). A borrower could not set aside a foreclosure sale based on the repeated postponement of a foreclosure sale for periods of five or fewer business days during the time a sale is enjoined or stayed. Hicks v. E.T. Legg & Assocs., 89 Cal. App. 4th 496, 508 (2001) (holding that Civil Code § 2924g(d), which requires seven business days between the injunction or stay and the sale, does not prohibit postponements of five or fewer business days made during the enjoinment or stay).
Additionally, a borrower had no private right of action to challenge a foreclosure based on a lack of possession of the original promissory note. Debrunner v. Deutsche Bank Nat. Trust Co., 204 Cal. App. 4th 433, 440 (2012) (holding that nothing in the statutes governing non-judicial foreclosures precludes foreclosure when the foreclosing party lacks the original promissory note). Finally, borrowers had no private right of action based upon the contention that lenders gave them a loan they could not afford. See Perlas v. GMAC Mortgage, LLC, 187 Cal. App. 4th 429, 436 (2010) (holding that the borrowers could not state a valid cause of action for fraudulent misrepresentation when the lenders knowingly inflated the borrowers’ income and represented to them that they could make the loan payments, even though the borrowers could not possibly afford the loan payments based on their actual income).
(a) Viable Pre-HBOR Suits Based on Statutory Violations
Despite the court’s unwillingness to find viable private rights of actions for most statutory violations in most foreclosure actions, there were limited instances in which courts have found a private right of action against a lender to exist. These are lawsuits based on violations of Civil Code § 2923-5. (see Mabry v. Superior Court, 185 Cal. App. 4th 208 (2010) (discussing options to avoid foreclosure)) and Civil Code § 2924g(d) (see Ragland v. U.S. Bank Nat. Ass’n, 209 Cal. App. 4th 182, 201 (2012) (prohibiting foreclosure sales for seven days after the expiration of an injunction or bankruptcy)).
Moreover, courts have held that violations of Civil Code § 2924g(d) also created a homeowner’s private right of action. Ragland, 209 Cal. App. 4th at 201. In Ragland, the court relied on the reasoning provided in Mabry to hold that there is a private right of action implicitly created in the language of Civil Code § 2924g(d).
Even though courts have found a private right of action existed for violations of Civil Code §§ 2923.5 and 2924g(d), these decisions limited the remedy available to borrowers to a postponement of a foreclosure sale. Borrowers could not set aside a foreclosure sale if the suit was brought post-foreclosure, nor recover any monetary damages against lenders for these violations. See Mabry, 185 Cal. App. 4th at 226 (holding that section 2923.5 “is limited to affording borrowers only more time when lenders do not comply with the statute”); see also Stebley v. Litton Loan Servicing, LLP, 202 Cal. App. 4th 522, 526 (2011) (holding that section 2923.5 neither provides for damages nor for setting aside a foreclosure sale, but only provides for more time before a foreclosure sale). Thus, courts have not only provided homeowners a private right of action for violations of only two statutes, but have also limited the homeowners’ remedies to postponement of sale.
(b) Viable Pre-HBOR Non-Statutory Private Rights of Actions
*15 Common law based private rights exist in limited situations. One court found a private right of action existed where the loan documents did not properly disclose a negative amortization loan. See Boschma v. Home Loan Ctr., Inc., 198 Cal. App. 4th 230, 249-54 (2011). In another case, a court found a private right of action to exist where the loan was unconscionable. Lona v. Citibank, N.A., 202 Cal. App. 4th 89, 111-12 (2011). Courts have also found there to be a private right of action under theories of promissory estoppel, finding that such a theory was supported where a borrower justifiably relied on a lender’s promise not to foreclose to the borrower’s detriment. Jolley v. Chase Home Fin., LLC, 213 Cal. App. 4th 872, 897 (2013); Raedeke v. Gilbraltar Sau. & Loan Ass’n, 10 Cal. 3d 665, 674-75 (1974). Finally, a lender’s failure to provide a permanent loan modification after successful completion of a preliminary modification may be actionable. West v. JP Morgan Chase Bank, N.A., 214 Cal. App. 4th 780, 799 (2013).
Homeowner’s Bill of Rights (HB0R): An Overview
As the first state to take servicing srandards from the NMS and use them to create new statutory provisions, California extended the protections guaranteed by the settlement by not only holding the signators, but also the non-signators to the NMS accountable. Lois M. Jacobs & Heather E. Stern, supra at 24. Effective January 1, 2013, HBOR grants borrowers additional rights during the non-judicial foreclosure process. Alejandro E. Moreno et al., California Homeowner Bill of Rights: A New Mortgage Law for the New Year, JDSupra Law News (Dec. 12, 2012), http://www.jdsupra.com/legalnews/california-homeowner-bill-of-rights-a-n-36921/. HBOR consists of the following six bills: AB 278 and SB 900 (enforceability); AB 2610 (tenant rights); AB 1950 and SB 1474 (fraud prosecution); and AB 2314 (blight prevention). California Homeowner Bill of Rights (2013), available at http://www.oag.ca.gov/hbor. It is codified in Civil Code sections 2920.5, 2923.4, 2923.5, 2923.55, 2923.6, 2923.7, 2924, 2924.9, 2924.10, 2924.11, 2924.12, 2924.17, 2924.18, and 2924.19. Some of HBOR’s key provisions include the restriction on dual track foreclosure (Cal. Civ. Code § 2924.11), a guaranteed single point of contact (Cal. Civ. Code § 2923.7), verification of documents (Cal. Civ. Code § 2924.17), and enforceability (Cal. Civ. Code §§ 2924.12 and 2924.19). Id.
HBOR is designed to “ensure fair lending and borrowing practices for California homeowners” as is evidenced by the aforementioned key provisions. Id. HBOR requires lenders to take additional steps prior to serving a NOD, permits injunctive relief and monetary damages where none could be had before, and creates civil penalties for violations of certain statutes. Cal. Civ. Code §§ 2923.6, 2924.12, 2924.19. HBOR is available to most “borrowers” with few exceptions. A borrower is “any natural person who is a mortgagor or trustor and who is potentially eligible for any federal, state, or propriety foreclosure prevention alternative program offered by, or through, his or her mortgage servicer.” Cal. Civ. Code § 2920.5 (c)(1). Borrowers do not include individuals who have served for bankruptcy. Cal. Civ. Code § 2920.5(c)(2)(C). HBOR applies to “servicers” broadly. A “servicer” is defined as “a person or entity who directly services a loan, or who is responsible for interacting with the borrower, managing the loan account on a daily basis including collecting and crediting periodic loan payments ….” Cal. Civ. Code § 2920.5(a). HBOR divides servicers into two categories: those who process more than 175 foreclosures in a calendar year (hereinafter “Large Servicers”) and those who process fewer than 175 foreclosures (hereinafter “Small Servicers”). Depending on the category the *16 servicer belongs to, different provisions may apply. Regardless, HBOR changed the non-judicial foreclosure process by imposing new requirements. The requirements result in the extension of time when an application for loan modification is presented, the prohibition of dual tracking, the creation of a single point of contact, the prohibition of robo-signing, various additional bases for injunctive relief, the allowance of attorney’s fees, and more stringent requirements for lenders. Overall, it is clear that the legislature’s intent in enacting HBOR is to delay the foreclosure process and require lenders to seriously consider borrowers for the possibility of a loan modification.
HBOR: New Servicer Prerequisites Prior to Recording a NOD (Collectively “HBOR Pre-NOD Statutes”)
Under HBOR, prior to serving a NOD, servicers are required to provide borrowers with a written determination regarding the borrower’s eligibility for the requested loan modification if the borrower submitted a completed loan modification application. Cal. Civ. Code § 2920.5(a). Large Servicers are additionally required to send borrowers a written statement that the borrower may request certain documents pertaining to the foreclosure (i. e., copy of borrower’s promissory note or other evidence of indebtedness, borrower’s deed of trust or mortgage, etc.). Cal. Civ. Code § 2923.55(b)(1). Thus, lenders are required to comply with additional notice requirements.
When a borrower requests a foreclosure prevention alternative, servicers are required to create a single point of contact. Cal. Civ. Code § 2923.7(c). The single point of contact will remain on the borrower’s account until the servicer has determined that all foreclosure prevention alternatives have been exhausted or until the borrower’s account becomes current. Id.
Upon the borrower’s submission of a complete first lien modification application, these servicers are required to provide borrowers with written acknowledgement of receipt of the application. Cal. Civ. Code § 2923.10(a). This should contain information informing the borrower about the process, including any applicable deadlines and deficiencies discovered in the borrower’s application. Id.
Once one of these servicers denies a loan modification application, the servicer must provide the borrower with written notice identifying specific reasons for the denial. Cal. Civ. Code § 2923.6(f). At least thirty days following this wrirten denial, the borrower has a right to appeal. *17 Cal. Civ. Code § 2923.6(d). However, these servicers are not obligated to evaluate loan modification applications from borrowers who were already evaluated or had an opportunity to be evaluated prior to January 1, 2013 unless there has been a material change in the borrower’s circumstances. Cal. Civ. Code § 2923.6(g). This right to appeal lengthens the foreclosure process by delaying the process another additional thirty days.
Following thirty-one days, after the borrower receives the written denial or fifteen days after the denial of an appeal, a holder of a beneficial interest under the mortgage can file a NOD. Cal. Civ. Code §§ 2924(a) (6), 2923.6(e). With the provision allowing borrowers the right to appeal, HBOR thereby extends the non-judicial foreclosure process by an additional forty-five days following the denial of an appeal.
HBOR: New Requirements After Recording NOD (Collectively “HBOR Post-NOD Statutes”)
Within five business days of recording a NOD, Large Servicers are required to send a written communication to borrowers that includes information regarding the borrower’s eligibility for a foreclosure prevention alternative and the process in which to apply for such alternative. Cal. Civ. Code § 2924.9(a). This is not required if the borrower has already exhausted the loan modification process. Id. This provides borrowers with a final opportunity to avoid foreclosure even after a NOD has been recorded.
Additionally, whenever a sale is postponed for at least ten business days, all servicers are required to give the borrower written notice within five business days following postponement. Cal. Civ. Code § 2924.9(a)(5). This provision is a change from the previous law, which permitted oral notice up to the point a bid was accepted on the day of the sale.
Expanded Borrower Rights Under HBOR
Under HBOR, borrowers’ private rights of actions against lenders were greatly expanded. Unlike the statutes in effect prior to January 1, 2013, which courts found to only provide injunctive relief under two statutes, HBOR provides for injunctive relief and monetary damages for violations of no less than seven provisions under Civil Code section 2924.12(a)(1) by Large Servicers and an additional three provisions under Civil Code section 2924.19(a)(1) by Small Servicers.
Injunctive Relief Under HBOR
If a trustee’s deed upon sale has not been recorded, borrowers may bring an action for injunctive relief to enjoin servicers from violating certain statutes. Cal. Civ. Code §§ 2924.12(a)(1), 2924.19(a)(1). The instances in which a borrower is allowed to bring such action against a Small Servicer include: (1) when a servicer records a NOD either thirty days before the initial contact requirements have been satisfied or while a loan modification application is pending under Civil Code § 2924.18(a)(1) (Cal. Civ. Code §2923.5); (2) when a servicer records a declaration pursuant to Civil Code § 2923.5, a NOD, NOS, assignment of a deed of trust, or substitution of trustee or a servicer serving a declaration or affidavit relative to a foreclosure proceeding without ensuring that the documents are complete and supported by competent and reliable evidence (Cal. Civ. Code § 2924.17); (3) when a servicer records a NOD while a loan modification application is pending (Cal. Civ. Code § 2924.18(a)(1)) or records a NOD while a borrower is in compliance with an approved foreclosure prevention alternative plan (Cal. Civ. Code § 2924.18(a)(2)).
For Large Servicers, the statutes that provide a borrower with a private right of action are more extensive. In addition to *18 a violation of Cal. Civ. Code § 2924.17 (verification of documents), the instances in which a borrower is allowed to bring such action against a large servicer include: (1) when a servicer records a NOD without sending the borrower a written statement indicating the documents (e.g., copy of borrower’s promissory note) that a borrower may request, recording a NOD thirty days before the initial contact requirements have been satisfied, or recording a NOD before the time specifications under Civil Code § 2924.6 have expired (Cal. Civ. Code § 2923.55); (2) when a servicer records a NOD before thirty days from the date of a written denial has expired, before fourteen days has expired since a loan modification has been offered, or before fifteen days has expired since the denial of the appeal (Cal. Civ. Code § 2923.6); (3) when a servicer fails to create a single point of contact upon a borrower’s request for a foreclosure prevention alternative (Cal. Civ. Code § 2923.7); (4) when a servicer fails to send written communication to the borrower within five business days after recording a NOD that indicates a borrower may be eligible for a loan modification unless the borrower previously exhausted the process (Cal. Civ. Code § 2924.9); (5) when a servicer fails to provide written acknowledgment of receipt of a loan modification application within five business days (Cal. Civ. Code § 2924.10); and (6) when a servicer records a NOD while a borrower is in compliance with an approved foreclosure prevention alternative plan (Cal. Civ. Code § 2924.11(a)(1)).
Damages Under HBOR
Damages may be awarded to aggrieved borrower only after the trustee’s deed upon sale has been recorded. Servicers are liable to borrowers for actual economic damages for violations that remain uncorrected post-foreclosure. Cal. Civ. Code §§ 2924.12(b), 2924.19(b). The court may also award treble actual damages or $50,000, whichever is greater, for intentional or reckless violations. Id. Small Servicers are liable for material violations of Civil Code sections 2923.5 (notice requirements before recording a NOD), 2924.17 (verification of documents), or 2924.18 (prohibition of dual tracking). Large servicers are liable for material violations of Civil Code sections 2923-55 (notice requirements before recording a NOD), 2923.6 (additional time requirements), 2923.7 (single point of contact requirements), 2924.9 (loan modification after NOD recordation), 2924.10 (acknowledgement of loan modification application), 2924.11 (prohibition of dual tracking), or 2924.17 (verification of documents). However, a signatory to the NMS who is in compliance with the relevant terms of that consent judgment, is not liable for a violation of Civil Code sections 2923.55, 2923.6, 2924.9, 2924.10, 2924.11, or 2924.17. Cal. Civ. Code § 2924.12(g). Thus, for any inconsistencies between the NMS and the previously listed HBOR statutes, the signatories would not be liable under Civil Code § 2924.12. The situations in which this would occur would be limited as the HBOR statutes have codified virtually all of the NMS terms.
By providing the right to monetary damages under Civil Code § 2924.12(b) and 2924.19(b) only when a trustee’s sale has been completed, HBOR pressures servicers to negotiate loan modifications to avoid potential monetary damages. Since a NOS would not be recorded if there is a successful loan modification, the legislature must have intended to encourage servicers to consider loan modifications or risk civil monetary liability.
*19 Attorney’s Fees and Civil Penalties Under HBOR
As previously explained, Civil Code sections 2924.12 and 2924.19 have expanded the situations in which a borrower is allowed to seek relief against servicers by providing for injunctive relief for violations of numerous subsecrions. Moreover, by providing for damage after the foreclosure sale, the legislature has greatly expanded the scope of remedies available to homeowners.
Additionally, under HBOR the legislature has provided for the recovery of attorney’s fees by aggrieved borrowers attorney’s fees for successful legal actions against offending lenders. Cal. Civ. Code §§ 2924.12(i), 2924.19(h). If a borrower obtains injunctive relief or is awarded damages pursuant to Civil Code section 2924-12 or 2924.19, the court may award the borrower reasonable attorney’s fees and costs. Cal. Civ. Code §§ 2924.12(i), 2924.19(h).
Lastly, HBOR provides civil penalties for repeated violations of Civil Code § 2924.17(b), which provides that prior to serving any declarations or affidavits for a NOD, NOS or any part of a foreclosure proceeding, all servicers are required to review the documents and ensure that there is comperent and reliable evidence to substantiate the foreclosure. Servicers who engage in multiple and repeated uncorrected violations of Civil Code § 2924.17(b) by recording or serving improper documents are liable for a civil penalty up to $7,500 per mortgage or deed of trust in an enforcement action brought by the government. Cal. Civ. Code § 2924.17(c).
HBOR has afforded homeowners statutory rights in a wide range of situations where previously none existed in either statutory or common law. Moreover, the available remedies for aggrieved homeowners involved in improper foreclosure proceedings have been greatly expanded under HBOR, providing for expanded equitable relief, damages, attorneys fees, and civil penalties.


The Honorable Kirk H. Nakamura is a member of the Orange County Superior Court Civil Panel. He organized the first court-supervised Foreclosure Prevention Settlement Program in the state in response to the Foreclosure Crisis. The assistance of Juliette Tran is acknowledged in the writing of this article. He can be reached through the Editor-in-Chief at galisa@gmail. Com.

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