By Glen C. Hansen

In 2008, the California Legislature enacted Civil Code section 2923.5. That statute requires, before a notice of default may be filed, that a lender contact the borrower in person or by telephone to “assess” the borrower’s financial situation and to “explore” options for the borrower to prevent foreclosure.  In Mabry v. Superior Court (June 2, 2010) 185 Cal.App.4th 208, the Court of Appeal for the Fourth Appellate District addressed a case where plaintiff borrowers brought an action that requested a restraining order to prevent a foreclosure sale based on the lender’s alleged failure to comply with section 2923.5. The trial court denied plaintiffs’ request on the grounds of no private right of enforcement and federal preemption. The Court of Appeal reversed, and disagreeing with the trial court on both grounds.

The Court of Appeal held that an individual cause of action did exist to enforce section 2923.5 in order to satisfy the statutory goal of forcing the parties to communicate about a borrower’s situation and the options to avoid foreclosure. 

The Court also held that section 2923.5 was not preempted by federal law because the statute cannot require the lender to consider a whole new loan application or take detailed loan application information over the phone or in person. According to the Court, the statutory term “assessment” means something simple, such as “why can’t you make your payments?” And the statutory term “exploration” is similarly “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.”  In short, there is nothing in section 2923.5 that requires the lender to rewrite or modify the loan; and the lender “does not have any duty to become a loan counselor.”

The Court explained how the statute operates in conjunction with a private enforcement right. If the lender does not comply with section 2923.5, then there is no valid notice of default and a foreclosure sale cannot proceed; if the borrower brings an enforcement action, the court has the authority to postpone the sale until there has been compliance with section 2923.5. However, the Court also recognized that the lender’s noncompliance with section 2923.5 would not cause any cloud on title after an otherwise properly conducted foreclosure sale.

The Mabry court remanded the case to the trial court for an evidentiary hearing on the conflicting evidence in the record regarding whether the lender had complied with section 2923.5. According to the lender, not only were there numerous contacts with the borrowers, but the borrowers even initiated a proposal by which their attorney would buy the property. However, according to the borrowers, there was no contact at all. The Court of Appeal noted: “Rarely, in fact, are stories so diametrically opposite.” In the context of the current home foreclosure crises, such differences in testimony should not be all that surprising.

Glen C. Hansen is a senior associate at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.