California Court of Appeal Clarifies Critical Homeowner Bill of Rights Satisfaction Requirement

Lenders pursuing foreclosure of residential properties in California must satisfy the requirements of the California Homeowner Bill of Rights (HBOR), set forth at Cal. Civ. Code Sections 2920, et seq. HBOR's requirements apply to foreclosures of mortgages secured by residential real properties containing no more than four dwelling units. Among other things, HBOR Section 2923.5 prohibits lenders and mortgage servicers from initiating foreclosure by recording a notice of default without first contacting borrowers to explore foreclosure avoidance options. While this requirement appears simple on its face, many borrowers have sought to avoid or delay foreclosure by filing lawsuits alleging statutory noncompliance where contact was initiated by the borrowers, rather than by the lenders or servicers, on the grounds that lenders or servicers are required to initiate contact, not borrowers. Specifically, Section 2923.5(a)(2) provides as follows (emphasis added):

A mortgage servicer shall contact the borrower in person or by telephone in order to assess the borrower's financial situation and explore options for the borrower to avoid foreclosure.

Prior Decisions On Borrower-Initiated Contact

Since HBOR was enacted, various federal courts have found that HBOR's contact requirement is satisfied regardless of who initiates the contact, so long as contact is made and the parties discuss foreclosure alternatives in accordance with the statute. However, California courts had not published a decision on the issue, leaving open the question of whether borrower-initiated contact definitively satisfies the statutory requirement.

Schmidt v. Citibank Confirms Borrower-Initiated Contact Is Sufficient To Satisfy Contact Requirement Under HBOR

On November 7, 2018, in Schmidt v. Citibank, N.A., which was recently certified for publication, the California Court of Appeal formally adopted the federal courts interpretation of the statute, specifically holding that contacts initiated by borrowers satisfy the statutory requirement. While this case was decided based on a former version of the statute (Section 2923.55), the Schmidt ruling applies to current and future residential foreclosures given that Section 2923.55 was essentially reenacted through the presently-operative Section 2923.5.

In Schmidt, the borrowers filed suit against their loan servicer for various HBOR violations, and summary judgment was granted in favor of the servicer. On appeal, the borrowers argued, among other things, that because they, and not their loan servicer, initiated the contacts that led to a discussion of foreclosure alternatives, their servicer failed to satisfy its statutory obligations under the former Section 2923.55 and its commencement of a foreclosure was, accordingly, improper.

The Court of Appeal rejected the borrowers' argument, holding that the servicer fully satisfied HBOR's contact requirement, and specifically confirmed that the statute does not require that a lender or servicer initiate the contact, and that borrower-initiated contact is sufficient to satisfy the statute. The Court further opined that to impose a requirement that contact must be initiated by a lender or servicer would be elevating form over substance, contrary to the intent of the statute.

Impact For Lenders And Mortgage Servicers

The Schmidt decision provides important confirmation for lenders and mortgage servicers seeking to ensure that their residential foreclosure practices satisfy HBOR, and would seem to eliminate one potential argument defaulting borrowers have used to stymie the enforcement of their creditors' rights. While this decision is important and helpful, lenders and servicers must remain vigilant regarding HBOR's many other requirements when dealing with borrowers in default in order to avoid needless delay, should a foreclosure become necessary.