Ballard Spahr LLP: Borrower May Sue Over Lender's Failure To Contact Prior to Foreclosure, California Appellate Court Rules

Ballard Spahr LLP: Borrower May Sue Over Lender's Failure To Contact Prior to Foreclosure, California Appellate Court Rules

by Alan S. Petlak

A residential lender's failure to contact a borrower prior to initiating nonjudicial foreclosure proceedings triggers a private right of action under California law, the California Court of Appeal has ruled.

In its July 3, 2012, opinion in Skov v. U.S. Bank National Association, the California Court of Appeal, Sixth District, held that a borrower could assert a cause of action against a residential lender under California Civil Code Section 2923.5 for failure to contact the borrower prior to recording a notice of default.

Section 2923.5 provides that a residential lender must contact a borrower "in person or by telephone in order to assess the borrower's financial situation and explore options for the borrower to avoid foreclosure" or satisfy due diligence requirements before a notice of default is recorded. The remedy for failing to comply with Section 2923.5 is postponement of the foreclosure sale.

The borrower in Skov defaulted on her home loan, prompting the lender to initiate nonjudicial foreclosure proceedings by the recording of a notice of default. The notice of default contained a declaration of compliance with Section 2923.5.

The borrower filed suit to prevent the foreclosure from going forward. Among other things, the borrower alleged that the lender did not comply with Section 2923.5 because the lender did not contact the borrower until after it recorded the notice of default. The trial court dismissed the action and the borrower appealed.

In reversing the dismissal, the appellate court held that the question of whether the lender properly complied with Section 2923.5 was an issue of fact that could not be resolved at the pleading stage. The appellate court further held, relying on an earlier California appellate decision, that Section 2923.5 necessarily confers an individual right of action because the statute's purpose is to force the lender and borrower to communicate about the specific borrower's situation and the specific borrower's options to avoid foreclosure.

Finally, the appellate court held that the National Bank Act-which "vests national banks ... with authority to exercise 'all such incidental powers as shall be necessary to carry on the business of banking'"-does not preempt Section 2923.5.

Lexis.com subscribers can access a Lexis enhanced version of the Skov v. U.S. Bank National Assn., 2012 Cal. App. LEXIS 779 (Cal. App. 6th Dist. June 8, 2012) decision with summary, headnotes, and Shepard's.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). The group includes the firm's Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial residential mortgage industry with formidable skill in litigation and depth in enforcement actions and transactions.

The Consumer Financial Services Group also produces the CFPB Monitor, a blog that focuses exclusively on important developments from the Consumer Financial Protection Bureau. To subscribe to the blog, use the link provided on the right.


Copyright © 2012 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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