Author: LegalEase Solutions

1. Are California’s non-judicial foreclosure laws preempted by any federal law (such as Home Owner’s Loan Act or the National Banking Act)?

Federal laws such as Home Owner’s Loan Act or the National Banking Act do not preempt California’s non-judicial foreclosure laws.

HOLA

Under the Home Owners’ Loan Act of 1933 (12 U.S.C. § 1461 et seq.) the federal Office of Thrift Supervision has issued section 560.2 of title 12 of the Code of Federal Regulations, a regulation that itself delineates what is a matter for federal regulation, and what is a matter for state law. Mabry v. Superior Court of Orange Cnty., 110 Cal.Rptr.3d 201, 216 (Cal. App., 2010).  Interestingly enough, section 560.2 is written in the form of examples, using the “ejusdem generis” approach of requiring a court to figure out what is, and what is not, in the same general class or category as the items given in the example.

On the preempted side, section 560.2 includes:

-“terms of credit, including amortization of loans and the deferral and capitalization of interest and adjustments to the interest rate” (§ 560.2(b)(4));

-“balance, payments due, or term to maturity of the loan” (§ 560.2(b)(4)); and, most importantly for this case, the “processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages.” (§ 560.2(b)(10), italics added.)

On the other side, left for the state courts, is “Real property law.” (12 C.F.R. § 560.2(c)(2).)

We agree with the Mabrys that the process of foreclosure has traditionally been a matter of state real property law, a point both noted by the United States Supreme Court in BFP v. Resolution Trust Corp. (1994),511 U.S. 531, 114 S.Ct. 1757, 128 L.Ed.2d 556,  and academic commentators (e.g., Alexander, Federal Intervention in Real Estate Finance: Preemption and Federal Common Law (1993) 71 N.C. L.Rev. 293, 293 [“Historically, real property law has been the exclusive domain of the states.”] ), including at least one law professor who laments that diverse state foreclosure laws tend to hinder efforts to achieve banking stability at the national level. (See Nelson, Confronting the Mortgage Meltdown: A Brief for the Federalization of State Mortgage Foreclosure Law (2010) 37 Pepperdine L.Rev. 583, 588-590 [noting that mortgage foreclosure law varies from state to state, and advocating federalization of mortgage foreclosure law].) By contrast, we have not been cited to anything in the federal regulations that govern such things as initiation of foreclosure, notice of foreclosure sales, allowable times until foreclosure, or redemption periods. (Though there are commentators, like Professor Nelson, who argue there should be.) Mabry at 217-218.

Given the traditional state control over mortgage foreclosure laws, it is logical to conclude that if the Office of Thrift Supervision wanted to include foreclosure as within the preempted category of loan servicing, it would have been explicit. Nothing prevented the office from simply adding the words “foreclosure of” to section 560.2(b)(10). Mabry at 218.

NBA

The National Bank Act “vests national banks . . . with authority to exercise ‘all such incidental powers as shall be necessary to carry on the business of banking.’ (12 U.S.C. § 24 (Seventh).) Real estate lending is expressly designated as part of the business of banking. (12 U.S.C. § 371(a).) [¶] As the agency charged with administering the [National Bank] Act, the Office of the Comptroller of the Currency (‘OCC’) has the primary responsibility for the surveillance of the ‘business of banking’ authorized by the Act. [Citation.] To carry out this responsibility, the OCC has the power to promulgate regulations and to use its rulemaking authority to define the ‘incidental powers’ of national banks beyond those specifically enumerated in the statute. [Citations.] OCC regulations possess the same preemptive effect as the Act itself. [Citation.]” (Martinez v. Wells Fargo Home Mortg., Inc. (2010),598 F.3d 549.) Skov v. U.S. Bank Nat’l Ass’n Page 14 (Cal. App., 2012) (Not to be published Opinion)

The OCC regulations, which outline the powers of national banks, include 12 Code of Federal Regulations § 34.4, subdivision (a). It provides that “state laws that obstruct, impair, or condition a national bank’s ability to fully exercise its Federally authorized real estate lending powers do not apply to national banks.” More specifically, “a national bank may make real estate loans . . . without regard to state law limitations concerning . . . [p]rocessing, origination, servicing, sale or purchase of, or investment or participation in, mortgages.” (12 C.F.R. § 34.4, subd. (a)(10).) However, “[s]tate laws on the following subjects are not inconsistent with the real estate lending powers of national banks and apply to national banks to the extent that they only incidentally affect the exercise of national banks’ real estate lending powers: [¶] . . . [¶] . . . Acquisition and transfer of real property.” (12 C.F.R. § 34.4, subd. (b)(6).). Skov at 14.

Mabry, supra, 185 Cal.App.4th 208 held that 12 Code of Federal Regulations section 560.2, subdivision (b)(10), which is the Office of Thrift Supervision’s parallel regulation under the Home Owners’ Loan Act,8 did not preempt section 2923.5. As does 12 Code of Federal Regulation section 34.4, this regulation sets forth which matters are regulated by federal law and which matters are left to state regulation. (Mabry, at pp. 228-229.) State laws, including “[r]eal property law,” are not preempted “to the extent that they only incidentally affect the lending operations of Federal saving associations . . . .” (12 C.F.R. section 560.2 (c)(2).) Mabry reasoned: “[T]he process of foreclosure has traditionally been a matter of state real property law, a point noted both by the United States Supreme Court in BFP v. Resolution Trust Corp. (1994),511 U.S. 531, and academic commentators (e.g., Alexander, Federal Intervention in Real Estate Finance: Preemption and Common Law (1993) 71 N.C. L.Rev. 293, [‘Historically, real property law has been the exclusive domain of the states.’ (italics omitted)]), including at least one law professor who laments that diverse state foreclosure laws tend to hinder efforts to achieve banking stability at the national level. (See Nelson, Confronting the Mortgage Meltdown: A Brief for the Federalization of State Mortgage Foreclosure Law (2010) 37 Pepp. L.Rev. 583, 588-590 [noting that mortgage foreclosure law varies from state to state, and advocating federalization of mortgage foreclosure law].) By contrast, we have not been cited to anything in the federal regulations that governs such things as initiation of foreclosure, notice of foreclosure sales, allowable times until foreclosure, or redemption periods. (Though there are commentators, like Professor Nelson, who argue there should be.) [¶] Given the traditional state control over mortgage foreclosure laws, it is logical to conclude that if the Office of Thrift Supervision wanted to include foreclosure as within the preempted category of loan servicing, it would have been explicit. Nothing prevented the office from simply adding the words ‘foreclosure of to Regs. section 560.2(b)(10).” (Mabry, at pp. 230-231, fn. omitted.) Skov at 14-15.

U.S. Bank argues that “[w]hile a state law governing foreclosure procedure may not be preempted, section 2923.5 is not such a law.” As Mabry noted, however, ” ‘the States have created diverse networks of judicially and legislatively crafted rules governing the foreclosure process, to achieve what each of them considers the proper balance between the needs of lenders and borrowers. . . . [A]bout half of the States also permit foreclosure by exercising a private power of sale provided in the mortgage documents. . . . Foreclosure laws typically require notice to the defaulting borrower, a substantial lead time before the commencement of foreclosure proceedings, publication of a notice of sale, and strict adherence to prescribed bidding rules and auction procedures. . . . (BFP v. Resolution Trust Corp., supra, 511 U.S. at pp. 541-542)’ ” (Mabry, supra, 185 Cal.App.4th at p. 230, fn. 17.) By requiring a lender to contact a borrower prior to filing a notice of default to “assess” his financial situation and to “explore” options to avoid foreclosure, section 2923.5 merely sets forth one of the steps in foreclosure proceedings. Moreover, given that section 2923.5 does not require the lender to modify the loan and a lender’s failure to comply with the statute is limited to providing borrowers with more time, it only incidentally affects the lending operations of a bank. Skov at 16.

U.S. Bank claims that section 2923.5 “seeks to compel loan modifications as a means of avoiding foreclosures and curbing high foreclosure rates, mandates specific disclosures to borrowers, and requires burdensome reviews of borrower financials and proposed loan modifications” thus regulating “loan servicing and processing . . . .” As Mabry pointed out, however, section 2923.5 must be very narrowly construed to avoid federal preemption. (Mabry, supra, 185 Cal.App.4th at pp. 231-232.) Section 2923.5 does not require the lender “to consider a whole new loan application or take detailed loan application information” from the borrower. (Mabry, at p. 232.) Moreover, the exploration of options to avoid foreclosure “must necessarily be limited to merely telling the borrower the traditional ways that foreclosure can be avoided (e.g., deeds ‘in lieu,’ workouts, or short sales), as distinct from requiring the lender to engage in a process that would be functionally indistinguishable from taking a loan application in the first place.” (Ibid.) We find Mabry’s analysis convincing. Thus, since the federal regulation of national banks is essentially the same as that of federal savings association, we conclude that section 2923.5 is not preempted by federal law. Skov at 16-17.

1. Is CA Civ Code (“CC”) section 2923.5 preempted by federal law?

California Civil Code section 2923.5 is not preempted because the remedy for noncompliance is a simple postponement of the foreclosure sale.  Mabry v. Superior Court of Orange Cnty., 110 Cal.Rptr.3d 201, 205 (Cal. App., 2010).

Section 2923.5 has been interpreted by California appellate courts as giving a private right of action against a lender for failing to contact or make good faith attempts to contact the borrower to discuss ways to avoid foreclosure, with the remedy being a postponement of foreclosure until the lender has complied with 2923.5. Mabry v. Superior Court of Orange Cnty., 110 Cal.Rptr.3d 201 (Cal. App., 2010).  The Mabry opinion has been recognized and cited by dozens of Federal district courts in Californa.

As long as the relief under section 2923.5 is limited to just postponement, the section is not preempted by federal law. Mabry v. Superior Court of Orange Cnty., 185 Cal.App.4th 208, 110 Cal.Rptr.3d 201, 213 (Cal. App., 2010).  A remarkable aspect of section 2923.5 is that it appears to have been carefully drafted to avoid bumping into federal law, precisely because it is limited to affording borrowers only more time when lenders do not comply with the statute. Id.  To explain that, though, we need to make a digression into state debtors’ relief acts as they have manifested themselves in four previous periods of economic distress. Id.

An earlier decision of the California Supreme Court, Wellenkamp v. Bank of America (1978),21 Cal.3d 943, 148 Cal.Rptr. 379, 582 P.2d 970, had encouraged this sort of creative financing by holding that due-on-sale clauses violated California state law as an unreasonable restraint on alienation. Despite that precedent, the trial judge in the de la Cuesta case (Edward J. Wallin, who would later join this court) held that regulations issued by the Federal Home Loan Bank Board, by the authority of the Home Owners’ Loan Act of 1933 preempted state law that invalidated due-on-sale clause. A California appellate court in the Fourth District (in an opinion by Justice Marcus Kaufman, who would later join the California Supreme Court) reversed the trial court. The United States Supreme Court, however, agreed with Judge Wallin’s determination, and reversed the appellate judgment and squarely held the state law to be preempted. Mabry at 215.

The de la Cuesta court observed that the bank board’s regulations were plain-“even” the California appellate court had been required to recognize that. ( de la Cuesta, supra, 458 U.S. at p. 154, 102 S.Ct. 3014). On top of the express preemption, Congress had expressed no intent to limit the bank board’s authority to “regulate the lending practices of federal savings and loans.” ( Id. at p. 161, 102 S.Ct. 3014.) Further, going into the history of the Home Owners’ Loan Act, the de la Cuesta court pointed out that “mortgage lending practices” are a “critical” aspect of a savings and loan’s “ ‘operation,’ ” and the Home Loan Bank Board had issued the due-on-sale regulations in order to protect the economic solvency of such lenders. (See id. at pp. 167-168, 102 S.Ct. 3014.) In what is perhaps the most significant part of the rationale for our purposes, the bank board had concluded that “the due-on-sale clause is ‘an important part of the mortgage contract,’ ” consequently its elimination would have an adverse effect on the “financial stability” of federally chartered lenders. ( Id. at p. 168, 102 S.Ct. 3014.) For example, invalidation of the due-on-sale clause would make it hard for savings and loans “to sell their loans in the secondary markets.” ( Ibid.) Mabry at 215.

With this history behind us, we now turn to the actual regulations at issue in the case before us.  State law should be construed, whenever possible, to be in harmony with federal law, so as to avoid having the state law invalidated by federal preemption. (See Greater Westchester Homeowners Assn. v. City of Los Angeles (1979),26 Cal.3d 86, 160 Cal.Rptr. 733, 603 P.2d 1329; California ARCO Distributors, Inc. v. Atlantic Richfield Co. (1984),158 Cal.App.3d 349, 204 Cal.Rptr. 743.) Mabry at 215.

We emphasize that we are able to come to our conclusion that section 2923.5 is not preempted by federal banking regulations because it is, or can be construed to be, very narrow. As mentioned above, there is no right, for example, under the statute, to a loan modification. Mabry at 215.

Civil Code section 2923.5 does not provide for damages, or for setting aside a foreclosure sale, nor could it do so without running afoul of federal law, that is, the Home Owners Loan Act (15 U.S.C. § 1641; “HOLA”), and implementing regulations (12 C.F.R. § 560.2(b)). (See generally, Harris v. Wachovia Mortgage, FSB (2010),185 Cal.App.4th 1018–1026, 111 Cal.Rptr.3d 20 [broad preemptive effect of HOLA regulations]; Silvas v. E*Trade Mortgage Corp. (9th Cir.2008) 514 F.3d 1001, 1004–1006.) The statute was “carefully drafted to avoid bumping into federal law” regulating home loans. ( Mabry, supra, 185 Cal.App.4th at p. 226, 110 Cal.Rptr.3d 201.) As a result, the sole available remedy is “more time” before a foreclosure sale occurs. ( Ibid.) After the sale, the statute provides no relief. ( internal citations omitted) Charles v. Stebley, 134 Cal.Rptr.3d 604, 607 Cal. Daily Op. Serv. 175, 2012 Daily Journal D.A.R. 9 (Cal. App., 2011).

2. Is CC2923.5 part of the CA statutory scheme of foreclosure under CC2924 et seq?

Section 2923.5 is one of a series of detailed statutes that govern mortgages that span sections 2920 to 2967. Within that series is yet another long series of statutes governing rules involving foreclosure. Mabry at 209.  This second series goes from section 2924, and then follows with sections 2924a through 2924 l. (There is no section 2924m … yet.) Id.  Section 2923.5 concerns the crucial first step in the foreclosure process: The recording of a notice of default as required by section 2924. (Just plain section 2924-this one has no lower case letter behind it.) Id.

The key text of section 2923.5-“key” because of the substantive obligation it imposes on lenders-basically says that a lender cannot file a notice of default until the lender has contacted the borrower “in person or by telephone.” Thus an initial form letter won’t do. To quote the text directly, lenders must contact the borrower by phone or in person to “assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure.”  Mabry at 209.  The statute, of course, has alternative provisions in cases where the lender tries to contact a borrower, and the borrower simply won’t pick up the phone, the phone has been disconnected, the borrower hides or otherwise evades contact.  Mabry at 210.

3. Can CC2924 exist and be legally followed by a foreclosing lender without compliance with CC2923.5?

Section 2923.5. provides that a notice of default under section 2924 cannot be filed until 30 days after “[a] mortgagee, trustee, beneficiary, or authorized agent” contacts the borrower “in order to assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure.” (§ 2923.5, subd. (a)(1), (2).) When filed, the notice of default must include a declaration that the foreclosing entity contacted the borrower or “tried with due diligence” to contact the borrower, as provided in the section. (Id., subd. (b).)  As with the nonjudicial foreclosure statutory scheme at sections 2924-2924k, nothing in this section supports finding a right to bring a lawsuit to require a foreclosing entity to prove its compliance to a court.  To read such a right into this statute “would fundamentally undermine the nonjudicial nature of the process and introduce the possibility of lawsuits filed solely for the purpose of delaying valid foreclosures.” (Gomes, supra, 192 Cal.App.4th at p. 1155.) Taasan v. Family Lending Servs., Inc. Page 9, (Cal. App., 2012) (Not to be Published Opinion)

Once the foreclosure sale has occurred, the borrower has no remedy for a violation of section 2923.5.  Forbes v. Countrywide Home Loans, Inc, Page 16,  (Cal. App., 2011) (Not to be published Opinion).  A borrower’s sole remedy for any violation of section 2923.5, including the complete failure to include any declaration with the notice of default, is to postpone the foreclosure sale before the sale has taken place. (Mabry, supra, 185 Cal.App.4th at p. 235.).  As explained in Mabry: “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.” (Mabry, supra, 185 Cal.App.4th at pp. 223-225, 235 [reading § 2923.5 in conjunction with § 2924g].) The only right that section 2923.5 confers on a borrower is the right to be contacted in order to “assess” and evaluate” alternatives to foreclosure, before a notice of default is recorded. (Mabry, supra, at p. 225.) Allowing a borrower to enforce this right by setting aside “an otherwise properly conducted foreclosure sale” would defeat one of the purposes of California’s “‘comprehensive statutory scheme'” governing nonjudicial foreclosures (§§ 2924-2924l), which is “‘”‘to ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser.'”‘” (Mabry, supra, at p. 235, quoting Melendrez v. D & I Investment, Inc. (2005) 127 Cal.App.4th 1238, 1249-1250.)

4. If CC2923.5 is preempted by federal law, can a national bank foreclose under CC2924 without complying with CC2923.5?

California Civil Code section 2923.5 is not preempted because the remedy for noncompliance is a simple postponement of the foreclosure sale.  Mabry v. Superior Court of Orange Cnty., 110 Cal.Rptr.3d 201, 205 (Cal. App., 2010).

5. If a national bank CANNOT legally follow the statutes under CC2924 without compliance with CC2923.5, then is a national bank prevented from using the California non-judicial process all together?

Once the foreclosure sale has occurred, the borrower has no remedy for a violation of section 2923.5.  Forbes v. Countrywide Home Loans, Inc, Page 16,  (Cal. App., 2011) (Not to be published Opinion).  A borrower’s sole remedy for any violation of section 2923.5, including the complete failure to include any declaration with the notice of default, is to postpone the foreclosure sale before the sale has taken place. (Mabry, supra, 185 Cal.App.4th at p. 235.).

As a number of courts have explained, the only available remedy for a violation of section 2923.5 is to postpone the foreclosure sale so that the lender can comply with that statute’s requirements. (See Mabry v. Superior Court (2010),185 Cal.App.4th 208 (Mabry); see also Hamilton v. Greenwich Investors XXVI, LLC (2011),195 Cal.App.4th 1602 [following Mabry]; Stebley v. Litton Loan Servicing, LLP (2011),202 Cal.App.4th 522 [following Mabry].) After a foreclosure sale has already taken place, the statute provides no relief. (Stebley v. Litton Loan Servicing, LLP, supra, at p. 526; see also Mabry, supra, at p. 235.) “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.” (Mabry, supra, at p. 235.) Thus, even if we were to agree with Feng’s proposed construction of section 2923.5 and conclude that PNC violated that statute, our conclusion would have no effect on the validity of the foreclosure sale or upon U.S. Bank’s title to the property. Consequently, there is no reason to believe that this appeal will have any effect upon the separate unlawful detainer action filed by U.S. Bank. Yingyu Feng v. PNC Mortg. Page 6, (Cal. App., 2012) (Not to be published Opinion).

The operation of section 2923.5 is highly fact-specific, and details as to what might, or might not, constitute compliance with it can readily vary from lender to lender and borrower to borrower.  As a result, although a borrower may enforce rights under California Civil Code 2923.5, the Mabry decision holds that: (a) those rights are very narrow and exist only prior to foreclosure; and (b) if successful, the plaintiff-borrower’s remedy is limited to delaying foreclosure until the lender has complied with section 2923.5.