Foreclosures are declining in number, but they’re still occurring at above-normal rates. Whether you’re new to foreclosure practice or have been in it for years, these tips will help you meet the challenges of newly adopted and heavily revised statutes and regulations governing mortgage foreclosure in California.
Promissory notes and deeds of trust are enforceable contracts with many clauses that give the lender a choice of remedies if the borrower defaults. But California and federal law put limitations on these remedies—the hasty pursuit of one remedy may bar the use of another. Whether you represent borrowers or lenders, here are 10 tips to keep in mind:
- Consider what form of foreclosure to pursue. Foreclosure may take more than one form: judicial (requiring court action) or nonjudicial (trustee sale held at a private auction). Each type of foreclosure has its advantages and disadvantages, and these must be known and evaluated fully before the foreclosure process begins. Under CC §2924(a)(6), the foreclosing entity must have authority to conduct nonjudicial foreclosure. This rule applies to both residential and commercial mortgage loans; when authority to foreclose is lacking, the sale is probably invalid.
- Explore loss mitigation; it’s the law. California has laws requiring lenders and their servicers to explore loss mitigation options on residential loans in default (these laws culminated in the Homeowner Bill of Rights (HBR)). Although the HBR doesn’t mandate a particular result, it embodies a policy to encourage loss mitigation agreements.
- Pay attention to federal regulations. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, which amended consumer protection laws for residential lending in 2011 and empowered the Consumer Financial Protection Bureau (CFPB) to issue regulations on the servicing of residential mortgage loans. The CFPB has published regulations, effective January 10, 2014, requiring loan servicers to comply with complex loss mitigation procedures for covered residential mortgage loans. See 12 CFR §§1024.30(c)(2), 1024.39–1024.41.
- Beware the consequences of failure to comply with statutes and regulations. Lack of compliance with statutes and regulations governing nonjudicial foreclosure, e.g., those that mandate loss mitigation consideration or prohibit dual tracking, may delay the foreclosure. Lenders may also face claims for breach of contract, fraud, promissory estoppel, or damages resulting from tortious acts during loan servicing.
- Don’t let a client try self-help. Certain remedies first chosen and pursued by the lender will, as a matter of law, impair the enforceability of the lender’s security interest or the borrower’s monetary obligations. For example, lenders must avoid self-help measures, such as setoff of borrower’s funds.
- Consider preemption issues. Complex questions of preemption may arise in lender liability actions because of inconsistencies between state and federal law, field preemption in areas of exclusive federal regulation, or other reasons. Research these fully before filing or answering a complaint.
- Understand the tender rule in trustee sale challenges. When a borrower challenges a trustee sale in an action to enjoin it or set it aside, some courts require that the borrower “do equity” by tendering the amount of the debt owing; the tender rule doesn’t apply in every action challenging a trustee sale and is frequently misunderstood. Compare Nguyen v Calhoun (2003) 105 CA4th 428, with Lona v Citibank (2011) 202 CA4th 89.
- Beware that debt collection statutes may apply. For consumer debt collection, a lawyer’s conduct can be regulated by the Fair Debt Collection Practices Act (15 USC §§1692–1692p). See Jerman v Carlisle, McNellie, Rini, Kramer & Ulrich LPA (2010) 559 US 573. The applicability of the FDCPA to foreclosure proceedings is currently unsettled.
- Keep track of new emerging theories for suits against lenders. Carefully monitor and record the lender’s or its servicer’s conduct in loan administration, because a court will examine the entire relationship between lender and borrower—not just documents—to determine lender’s legal duties. See, e.g., Riverisland Cold Storage, Inc. v Fresno-Madera Prod. Credit Ass’n (2013) 55 C4th 1169.
- Know what you’re dealing with from Day 1. Assignee of originating lender should review loan origination process, loan documents, and prior loan administration for evidence of potential lender liability and borrower defenses to loan enforcement before starting foreclosure.
This area of law is very complex and is constantly being revised by regulations, court decisions, and statutory amendments. The best way to strategize, prepare a plan of action, and understand all the traps for the unwary is to have reliable, secondary resource like CEB’s California Mortgages, Deeds of Trust, and Foreclosure Litigation.
Related CEB blog posts:
- Choose the Best Answer for a Property Owner: (a) Short Sale or (b) Foreclosure
- California Homeowner Bill of Rights: Does It Have Teeth?
- Is Reverse Mortgage the Way to Go?
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