[author: 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.
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